In investing, as in other parts of life, recovery is not necessarily a linear or quick affair. It can instead happen gradually, and only after fundamental change. Over the past two years, the investment trust sector has been nursing itself back to health after the bad fall experienced between 2022 and 2023.

The patient is not back in top shape yet, but looks less pale. The sector’s weighted average discount to net asset value (NAV), excluding private equity outlier 3i Group (III) and VCTs, stood at 13.5 per cent as at 3 November. This compares with 16.2 per cent one year before and 19.3 per cent in 2023, implying that things are slowly but surely improving. However, the figure was 2.6 per cent in December 2021 – the sector still needs a huge rally to get back there.

This year’s recovery can be attributed to a mix of factors. Firstly, Global investors are tentatively looking beyond the US for returns, backing markets that have long been overlooked, including the UK and emerging markets.

Investment trusts are actively managed, and the universe comprises vehicles offering exposure to a wide range of markets and sectors, so any shift away from the concentration of US stocks is helpful. A number of investment trusts are also part of the FTSE 350, meaning improving sentiment towards UK shares, as expressed via the use of tracker funds, helps them regardless of what their underlying assets do.

Finally, corporate action across the sector has continued apace, as we discuss in more detail elsewhere in this special. Buybacks, mergers and acquisitions have left the sector leaner, more accurately reflecting demand levels from investors and leaving existing shareholders better off.

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Global investors are now grappling with the question of whether US tech and AI are, in fact, in a bubble. While in many cases valuations are not completely unrealistic, they do look frothy, and calls for caution and diversification are becoming more insistent. Private investors who want to create a diversified portfolio, with varied exposure across sectors, regions and styles, can find everything they might possibly need or want in investment trusts – from aggressive growth capital plays to multi-asset portfolios focused on wealth preservation.

If investors continue to consider markets beyond the US, and corporate action in the investment trust sector maintains its momentum, discounts could well narrow further.

Discount shifts

The table below shows how discounts have moved over the past year across the main investment trust sectors, ranked from the sector where they have narrowed the most (growth capital) to where they have in fact widened the most (European property).

Discounts narrow or widen for a range of reasons, and it isn’t always easy to tell what’s driving the change. “In an ideal world, strong underlying performance should drive increased demand for shares and narrow discounts,” says Peel Hunt’s Anthony Leatham. “However, it is not always that simple. [Yet] In certain circumstances, the asset class ‘catches a bid’ and investors flock to a region or sub-sector to capture an opportunity.” Then there are discount control mechanisms such as share buybacks, tender offers, M&A activity and intervention from activist investors, all of which have been very present across the sector over the past year.

Growth capital is where discounts have narrowed the most. A good portion of this is due to the fact that the biggest trust in the sector, Petershill Partners (PHLL), saw a big boost after announcing it would delist from the London Stock Exchange.

But other growth capital trusts have also seen appetite for their shares increase on the back of strong performance: on average, the sector has enjoyed one-year share price total returns of more than 50 per cent in the year to 10 November. The most impressive performer was Seraphim Space (SSIT); its portfolio has been making notable progress but is also very concentrated, with the biggest holding, ICEYE, now accounting for 37 per cent of the NAV. The unquoted company runs a fleet of small satellites that enable clients to monitor any location on Earth.

While discounts within growth capital remain significant, they are perhaps no longer as attractive – considering that these portfolios tend to be concentrated and racy, and that various trusts in the broader private equity sector, which tend to invest in more mature and cash generative companies instead, trade at similar share price levels relative to NAV.

Emerging markets have also rebounded, partly as a result of the Chinese market’s rally and generally strong performance across the region. Templeton Emerging Markets (TEM) stands out here, its share price having gained 45.7 per cent in the year to 10 November. The trust invests in a fairly concentrated portfolio of quality companies and has a significant exposure to tech, with TSMC (TW:2330) accounting for 15 per cent of the trust as at 31 October.

An area where it is slightly surprising to see discounts narrowing is India, considering the region is one of the very few major markets to have witnessed lukewarm performance in the past year. This narrowing was once again largely driven by corporate action, as the biggest trust in the sector, the recently renamed JPMorgan India Growth & Income (JIGI), returned capital to shareholders via a tender for 30 per cent of its shares. Meanwhile, Abrdn New India (ANII) also saw its discount narrow significantly with the help of buybacks.

Towards the opposite end of the table, renewable infrastructure energy trusts saw their discounts widen by more than 8 percentage points on average. The sector has had to contend with a range of challenges, from lower power prices to below-forecast wind generation. It is now grappling with the government’s proposal to change the way it adjusts subsidies for inflation, which could result in a big hit to NAVs.

Discounts could tighten again once we have more clarity on the changes, but if you want to go bargain hunting in this area, you will need a lot of patience. For renewable energy trusts, the complexity and illiquidity of the underlying assets has meant that asset sales and corporate activity have not been quite as successful as in other corners of the investment trust universe.

Opportunities

Improving share prices raise the question of whether certain sectors and trusts have started to become a little pricey. But there are still a number of trusts on chunky discounts, including in areas that have performed strongly over the past year.

Kepler analyst Josef Licsauer thinks emerging markets have more room to run, adding “if we’re all being honest, I don’t think we would have guessed during ‘liberation day’, or even at the start of this year, that emerging markets would comfortably outperform most developed markets and do so with lower volatility.”

He thinks the region is shrugging off its perceived dependence on the US. He is optimistic about China and other emerging markets, including Taiwan, South Korea and Vietnam – these areas are exposed to AI innovation but at much lower valuations than their developed counterparts, he argues.

“India, I’m less convinced,” he adds. He says the sell off “has been great for those wanting to get back into the market at more attractive valuations”, but the correction might have further to go, “particularly given everyone’s sentiment is focused on China”.

He likes Fidelity Emerging Markets (FEML), whose ability to take short positions means that it can outperform in a range of environments, and whose gearing takes advantage of the wider range of strategies available to investment trusts compared to open-ended funds.

As the chart below shows, a variety of emerging market trusts are still trading well below their NAVs.

Licsauer also points at Japan and the UK as regions with further room for growth. For Japan, he suggests CC Japan Income & Growth Trust (CCJI), for its dividend record and local expertise, at a 7.8 per cent discount to NAV as at 10 November. Various Japanese trusts still trade at a discount despite the recent rally.

In the UK, some of the recent top performers such as Temple Bar (TMPL) and Aberdeen Equity Income (AEI) have seen their discounts close almost completely. But there are still cheaper options with strong long and medium-term track records, including Merchants (MRCH), Edinburgh Investment Trust (EDIN) and Lowland (LWI), at discounts to NAV of 7.4 per cent, 7.9 per cent and 10.1 per cent, respectively.

Leatham argues that healthcare and private equity are two areas that offer fertile ground for opportunities in the investment trust universe.

“In healthcare, the long-term structural drivers have been overshadowed by the cloud of tariff and drug pricing uncertainty,” he says. “There has been a significant de-rating in healthcare and biotech stocks, in line with the three other worst-hit periods in the last 35 years. Importantly, we are seeing an inflection point in news flow and fund flows, supported by M&A.” He likes Worldwide Healthcare (WWH) for its long-term record, diversified portfolio and discount (7.4 per cent as at 10 November).

Private equity trust discounts narrowed dramatically over the course of 2024, but the improvement was a little less marked this year. The sector is still struggling to exit investments, although dealmaking activity appears to be gradually picking up. Leatham likes HarbourVest Global Private Equity (HVPE) as a core holding for a diversified exposure to private equity; the trust is still one of the cheapest in its sector at a 31.5 per cent discount to NAV as at 10 November.

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When it comes to choosing an investment trust, you need to give careful consideration to its performance, cost and the discount or premium to net asset value (NAV) on which it trades. But given the array of options on offer, it can also be helpful to supplement your own research by examining where fund buyers are putting the money they manage. 

Every year we ask a selection of professional investors for their picks across four different types of investment: growth, income, wealth preservation and diversifying assets. We also take a look at how their choices from last year have performed. 

The professional investors 

• Richard Curling, manager of the Jupiter Fund of Investment Trusts (GB00B6R1VR15) and the Jupiter Monthly Alternative Income Fund (GB00B4WLF922)

• Adam Norris and Paul Green, managers of CT Global Managed Portfolio Trust (CMPG)

• Peter Walls, manager of the Unicorn Mastertrust (GB0031218018)

• Juliet Schooling Latter, investment director at FundCalibre

The Investment Trust Special Report

Use trusts to protect your portfolio from the bubble

The best investment trusts – chosen by professionals

Two investment trust income portfolios for the year ahead

Eight trusts to invest around the world

How buybacks and mergers are reshaping investment trusts

Trusts still grappling with the Saba effect

The best Isas and pensions for investment trusts

Win £5,000 to invest in an investment trust

How to pick the right investment trusts

Growth trusts

Richard Curling: Literacy Capital (BOOK) 

Literacy Capital is a small private equity company that does things rather differently. It has performed very well since listing in 2021, but NAV growth over the past year or so has been flat and the board has allowed the discount to drift out to nearly 30 per cent. However, on the bright side, this presents a possible opportunity for investors to get exposure on potentially attractive terms. The founders have a substantial stake in the company, which provides proper ‘skin in the game’. The strategy is to invest in family-owned or founder businesses generating between £1mn and £10mn earnings before interest, taxes, depreciation and amortisation (Ebitda), which have reached a point where they would benefit from experienced external investors to create additional value. Unlike most private equity funds, there is no performance fee on top and there is a charitable objective to give 0.5 per cent of NAV every year to charities focused on educational literacy.

Adam Norris and Paul Green: Oakley Capital Investments (OCI) 

Oakley Capital Investments is a private equity investment trust that partners and invests alongside European entrepreneurs. The trust focuses on four key sectors: business services, consumer, education and technology, with Oakley Capital often backing serial entrepreneurs who have demonstrated previous successes. In a tough ‘exit’ environment, Oakley has bucked the trend, with a recent sale achieving a 300 per cent uplift to the trust’s carrying value, demonstrating there remains a competitive dealmaking environment for desirable companies.

Peter Walls: Fidelity Emerging Markets (FEML) 

The biggest growth stories of the last 15 years have clearly emanated from the vibrant US technology sector. Just about everything else in the equity universe has disappointed in relative terms, including emerging markets. However, Fidelity Emerging Markets makes good use of the investment company structure, with significant exposure to mid and small capitalisation companies and an experienced management team that uses derivatives to enhance returns.

Juliet Schooling Latter: JPMorgan Emerging Markets (JMG)

Backed by one of the largest emerging market research teams, manager Austin Forey has delivered excellent returns on this trust for more than three decades, emphatically demonstrating that his long-term approach to stockpicking has been successful, while also being able to evolve this portfolio to meet changing trends. The focus on quality underpins that success, giving investors protection in challenging periods.

Forey essentially wants to answer two questions before buying a company: Is this a business they want to own? And, if yes, what price are they willing to pay for it?

Companies are placed into four strategic categorisations: premium, quality, standard or challenged. The majority of the trust (over 90 per cent) currently sits in the premium and quality buckets. The final portfolio holds between 50 and 80 stocks, with a typically low turnover. The managers’ long-term focus is also under-represented in markets – meaning the team is happy to wait for performance in certain stocks.

Income trusts

Richard Curling: Greencoat UK Wind (UKW) 

Greencoat UK Wind is the largest listed renewable infrastructure fund on the UK market. It operates 49 wind farms and aims to increase dividends in line with inflation while preserving capital value. It has built an enviable record of achieving this over the 12 years since IPO. Renewable energy stocks have had a rough time recently, with unusually low wind speeds over the summer combined with lower forecast electricity prices in the long term adversely impacting NAV calculations and sentiment. Being currently out of favour, Greencoat UK Wind now trades at a 25 per cent discount to NAV and gives investors a dividend yield of over 9 per cent, which should continue to grow in line with inflation.

Adam Norris and Paul Green: TwentyFour Income Fund (TFIF)

TwentyFour Income Fund invests in floating-rate credit bonds, backed by mortgage and corporate loans across the UK and Europe. The trust’s 9.5 per cent dividend yield is not only a strong underpinning for total return, but also adds diversification to a portfolio through achieving income with limited interest rate sensitivity. This is in contrast to many high-yielding investment trust sectors which have proved correlated to interest rate changes, such as infrastructure, property and renewable energy generation.

While The Big Short is a great watch (particularly if you are feeling bearish), much has changed since the global financial crisis. The film highlights how a similar asset class brought the financial system to the brink of collapse in 2008, but investors are now afforded significantly more security and protections on their investments. The TwentyFour ABS team has a strong long term record and manages around £8bn of client assets in this area.

Peter Walls: CT Private Equity Trust (CTPE) 

Over the past couple of years, there has been an increase in the number of trusts paying dividends based on the prior year’s NAV. While such policies are not to everyone’s liking, they do open the door to investors seeking a relatively high and regular dividend from investments that are more capital growth-orientated. So, if you’re looking for exposure to private equity but still want a decent dividend, check out the long-term performance, since its launch 25 years ago, of CT Private Equity. The shares trade at a discount to NAV of around 30 per cent and yield 5.9 per cent. 

Juliet Schooling Latter: Schroder Income Growth (SCF)

This is a core UK offering which invests in 35-55 stocks on a bottom-up basis, with no specific style bias. Having managed the portfolio since 2011, Schroder head of UK equities, Sue Noffke, invests in UK companies of various sizes, with the combination creating a portfolio of high-yielding companies, together with lower-yielding businesses, with a greater focus on future growth. 

Noffke currently has a strong position in UK mid-caps, which she says are on a greater discount than their larger peers in the FTSE 100, giving them greater scope for growth. The trust has a three-decade record of growing its dividend each year, as recognised by the Association of Investment Companies (AIC) award of dividend hero status.

Wealth preservation and portfolio protection

Richard Curling: RIT Capital Partners (RCP) 

RIT Capital Partners’ stated objective is to deliver long-term capital growth, while preserving shareholders’ capital. Performance over the past few years has been disappointing and investors have been wary of the high exposure to private equity. This has led to the discount widening out to the current 28 per cent, its widest level since the mid-1990s. There has been an extensive refresh of the managers, which seems to be gaining traction, and performance has been improving. The strategy remains to grow clients’ wealth meaningfully over the long term by investing in a well-balanced portfolio across the three main pillars of quoted equities, private investments and uncorrelated strategies. This looks like a classic mean reversion opportunity: a chance to pick up a quality trust at a wide discount, with the possible opportunity to make additional gains if the discount narrows.

Adam Norris and Paul Green: STS Global Income & Growth (STS) 

STS Global Growth & Income may not be the obvious selection for ‘wealth preservation’. However, the managers, James Harries and Tomasz Boniek, do aim for exactly that within equities: preserving and growing real wealth over the long term. Their style of investing in quality dividend payers has been somewhat of favour, with ‘defensive’ sectors trading at their largest PE discount to the S&P 500 for 25 years.

In addition, the trust runs a zero-discount policy, meaning investors are regularly able to buy and sell shares around NAV, which should cushion investors compared with other trusts whose discounts may widen in periods of market downturn. 

Peter Walls: 3i Infrastructure (3IN) 

It is difficult not to be impressed by the progression of the NAV and dividend growth that has been delivered by 3i Infrastructure. The trust invests in resilient infrastructure businesses that have good downside protection as well as growth prospects. The managers take controlling stakes that allow them to drive value-creation strategies and then recycle that capital to deliver strong returns to shareholders.  

Juliet Schooling Latter: City Of London Investment Trust (CTY)

Having grown its dividend each year for almost six decades, City of London Investment Trust aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It is a conservative portfolio of 80-90 holdings, with a diversified spread of sector positions and not overly concentrated stock weightings. The trust has been managed by Job Curtis since 1991 and has an excellent long-term record.

Curtis focuses on companies that can pay and increase their dividends over time. He pays close attention to valuations and is careful not to overpay when he initiates positions. Curtis also looks to provide shareholders with dividends between 10 per cent and 30 per cent higher than the average for the UK equity market. Dividends are distributed quarterly.

Trusts to diversify

Richard Curling: Cordiant Digital Infrastructure (CORD) 

Cordiant Digital Infrastructure provides a diversified exposure to the core infrastructure for the digital economy and AI. This is the fastest growing area of infrastructure and consists of data centres, fibre-optic networks and communication towers. These are highly cash-generative assets, with long-term inflation linked contracts to blue-chip customers. The company follows a strategy of buy, build, grow and has delivered on all of its objectives since IPO in 2021, exceeding the target of generating total returns of over 9 per cent per annum. The manager Steve Marshall has been consistently buying shares and has significant ‘skin in the game’, owning nearly 14mn shares. The trust currently trades at close to a 30 per cent discount to NAV, which represents excellent value. 

Adam Norris and Paul Green: 3i Infrastructure (3IN) 

3i Infrastructure’s record is exceptional, with a 12.5 per cent annualised shareholder return since its refocused strategy in 2015. Its ‘private equity owner’ approach to infrastructure investing provides the manager with significant influence over portfolio companies, many of which enjoy highly contracted cash flows supporting predictable returns for investors. 3IN’s jewel in the crown is TCR, the largest independent lessor of airport ground support equipment, operating in 230 airports across more 20 countries. TCR is now rumoured to be up for sale, which has the potential to be beneficial of NAV performance, if an uplift versus carrying value can be achieved.

Peter Walls: BlackRock Frontiers Investment Trust (BRFI) 

Given the prevailing concentration and stretched valuation of the US stock market, there are good reasons to seek greater diversification, so long as it doesn’t lead to ‘diworsification’. Distancing oneself from the so-called Magnificent Seven could be achieved through a modest allocation to BlackRock Frontiers Investment Trust. As the name suggests, developed markets are excluded, as are the larger emerging markets of Brazil, China, India, Korea, Mexico, Russia, South Africa and Taiwan. It’s no laggard, having produced share price and NAV total returns of 114 per cent and 122 per cent respectively over the past five years, more than two and a half times the average emerging markets trust return.  

Juliet Schooling Latter: TR Property Investment Trust (TRY) 

TR Property Trust invests in the shares of real-estate companies of all sizes, typically within Europe and the UK. It will also have a small amount invested in physical property in the UK. Its managers look for well-run businesses in sectors including retail, office, residential, industrial property and alternatives (which includes student accommodation, self-storage and healthcare). A key benefit of the trust is the ability to shift quickly between assets in uncertain times.

The trust has consistently outperformed and remains on an attractive discount (-9.2 per cent). It may well be moving into a positive period having seen rates peak and M&A activity pick-up. There remain plenty of attractive opportunities to tap into both from an income and total return perspective, and the team has shown historically they are more than capable of finding them.

How last year’s picks held up

Last year’s top performer in share price terms was space exploration trust Seraphim Space (SSIT). Migo Opportunities Trust’s (MIGO) co-manager Charlotte Cuthbertson selected it on the basis that the trust’s portfolio was “deeply embedded in rapidly maturing industries such as defence”. 

This approach has paid off, with increased defence spending over the past 12 months has helped drive the portfolio’s returns. “The past year has marked a profound inflection point for the portfolio, shaped by the tectonic shifts in global geopolitics and the accelerating rearmament of Europe in the wake of the waning ‘Pax Americana’,” Mark Boggett, the trust’s CEO, says. 

The knock-on effect of this has been to catalyse a “new era of profitability” for some of the trust’s key portfolio holdings, such as unlisted satellite companies ICEYE and HawkEye 360, with both “now delivering consistent quarter-on-quarter profits, reflecting both operational maturity and strategic relevance,” Boggett argues. 

The three next best performers were Chrysalis Investments (CHRY), Fidelity Special Values (FSV) and HarbourVest Global Private Equity (HVPE), all of which saw their shares rise by more than 30 per cent during the period. 

Growth capital fund Chrysalis has profited from the strong performance of two of its largest holdings: Klarna (US: KLAR) and Starling. Buy now, pay later service provider Klarna went public in September of this year, while fintech Starling has launched a suite of new product offerings. HarbourVest Global Private Equity also benefited from the Klarna IPO; several of its other portfolio companies have also gone public over the past 12 months, including Figma (US: FIG) and Verisure (SE: VSURE). Meanwhile, Fidelity Special Values (FSV) is reaping the rewards of a “renaissance” in UK equities in the face of growing global economic uncertainty, according to its portfolio manager Alex Wright. 

However, two trusts, Greencoat UK Wind (UKW) and Life Settlement Assets (LSAA), saw their share price drop over the past year. 

Renewable infrastructure trusts in general have gone through a turbulent period, as low wind speeds have led to lower than anticipated levels of power generation. Greencoat UK Wind was no exception. Over the first half of the year, the trust generated 2,581 gigawatt hours (GWh), which was 14 per cent below budget. Generation improved in Q3 but was still 5 per cent below anticipated levels. 

Meanwhile, Life Settlement Assets, which holds a portfolio of US life insurance policies, is bracing for reduced cash inflows over the coming years. The trust has made a strategic decision to move its portfolio from predominantly non-HIV policies to an entirely HIV based portfolio, according to chair Michael Baines.

Our Top 50 funds

IC Top 50: The best funds to buy

Best ways to grow your savings

Top managers who provide dividends

Ideal funds to protect your portfolio

Niche strategies that diversify