Investment trust specialists and industry commentators have called for a campaign to raise investment trusts’ profile, urging the industry to do more to educate investors about discounts and share buybacks and engage younger audiences.
Speaking at an industry event on Friday September 12, representatives of these companies said they hoped a campaign launched by Hub Agency, Quill PR and Warhorse Partners, would help tighten discounts and improve take-up.
At the event, as reported by FT Adviser, the companies launched a white paper, called The Missing Lever: A Blue Print Beyond Buybacks, alongside a screening of a documentary, which featured 23 voices from the industry.
The paper set out steps to address issues in the sector, which include an urgent need to attract new and younger investors.
But there are many aspects to ITs that need to be better understood by a wider range of investors and their advisers.
A campaign spokesperson said: “Investment trusts often struggle with visibility because they are less well understood than other investment vehicles, and retail investors can sometimes misunderstand how they work.”
FT Adviser takes a deeper look into buybacks and discounts:
One of the key arguments in the paper was that the sector should create more demand for their shares via better marketing and engagement if they hope to reverse the decline in the size of the sector and historically wide discounts.
The average investment trust discount to NAV was 14.1 per cent at the end of August, compared to 12.6 per cent at the end of 2023, 10.8 per cent at the end of 2022 and 2.1 per cent at the end of 2021, according to Winterflood Securities.
How buybacks work
Share buybacks, one of the ways in which trusts have tried to tackle discounts to NAV, can tighten them by pushing up the trust’s share price as a result of fewer shares being in circulation.
The value of investment trust share buybacks has massively increased over the past few years, from less than £2bn in 2021 to £7.5bn last year and £6.6bn over the first eight months of this year, according to Winterflood.
Retail investors can sometimes misunderstand how they work
However, investment trust discounts, on average, remain wide with buybacks sometimes only having a short term effect.
Discounts can widen again when a trust stops making purchases and cash used for making the buybacks is not necessarily available for dividends, new investments, paying down debt, or marketing and distribution — which can also narrow the discount.
Buybacks also reduce a trust’s size reducing potential buyers as some larger wealth managers do not use smaller trusts because they might not be able to buy and sell the volumes they need.
Age of the investor
The paper acknowledges the need for share buybacks but argues that they work best when demand for a trust is being built at the same time.
It said the average investment trust holder is between 60 and 65 years old and a wider age range needs to be targeted.
It suggested prioritising near retirees between ages 50 and 70 who are likely to value income, inflation protection and hard to access assets, but tend to invest in what is most visible.
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| Value of share buy backs (£bn) | 1.3 | 1.5 | 1.7 | 1.9 | 2.7 | 3.9 | 7.5 | 6.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Source: Winterflood Securities, Morningstar 31.08.25 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The paper proposed targeting investors in the accumulation phase, between 25 and 50, who are increasingly values driven, and interested in areas such as clean energy, infrastructure and innovation.
Investment trusts could also appeal to smaller investors because they provide access to assets they could not invest in otherwise, such as private equity, infrastructure, clean energy and property.
Examples in the paper included Greencoat UK Wind, which funds utility-scale renewable energy, and HICL Infrastructure, which owns hospitals, schools, roads and data centres.
“The closed-ended model suits long-duration capital expenditure with staged cash flows,” the paper stated.
Scottish Mortgage Investment Trust’s (SMT) investments, meanwhile, include smaller technology and biotech companies, including unquoted ones that exchange trade funds and open-ended funds would be unlikely to hold.
Unlike with open-ended funds, when investors dispose of holdings in investment trusts they have to sell them to other buyers on the secondary market rather than back to the trust.
This means that trusts don’t have to sell assets to meet redemptions, enabling them to hold illiquid assets for long periods.
More widely, investment trusts can help to construct a consistent income stream because they can reserve up to 15 per cent of the income they receive from their assets each year.
This means that, if in some years a trust’s investments do not generate as much revenue as necessary to pay dividends as planned, it can supplement it with cash from the revenue reserve.
This helps trusts to consistently maintain or raise dividends — something which is harder for open-ended funds and ETFs.
However, the white paper did not specifically address the problems financial advisers have in accessing investment trusts, including the fact that some platforms and discretionary fund managers do not offer them.
The Association of Investment Companies provides a list of the platforms which do offer investment trusts, information on how they work and their uses in portfolios.
Leonora Walters is a freelance journalist
