Investment trusts have on average traded at a discount for at least 53 consecutive years, according to analysis by the Association of Investment Companies.
The AIC’s research, based on Morningstar data ranging from December 1972 to December 2025, shows that the current period of double-digit discounts has so far lasted three years and seven months.
Meanwhile, the smallest average discount was 2 per cent in December 1993.
Rules around cost disclosures (which will be replaced with new rules by June 2027); dislike of the UK market in a low-growth economy; a fear of missing out on US growth and the performance of Magnificent Seven tech stocks; and rising interest rates that particularly affected alternative investment trusts are some of the factors driving the current period of double-digit discounts, says Peter Walls, manager of the Unicorn Mastertrust Fund.
The sector today is also “completely different” to 1993, says Ben Conway, chief investment officer at Hawksmoor Investment Management. “Back then it was made up of a lot more vanilla assets like liquid equities, which tend to trade a lot tighter to net asset value.”
Separate analysis from the AIC shows that almost half of investment trust assets (46 per cent) were in alternatives at the end of 2023, while the remainder (54 per cent) were invested in equities.
Indeed, a lot of trusts investing in yield-generating, alternative assets launched in the low-rate environment leading up to the pandemic, says Thomas McMahon, head of investment companies research at Kepler Partners.
“These typically geared up to generate an attractive yield. We then saw an incredibly fast series of rate hikes . . . Bonds and cash offered higher yields, so share prices had to adjust down for trusts to offer a sufficient yield premium.
“The cost of debt was much higher, meaning return forecasts had to be adjusted lower for any trusts with floating rate debt or which had to regear in the near future. And economies slowed under the pressure of higher rates, meaning investor risk aversion was higher.”
But interest rate cuts and corporate activity are likely to see discounts narrow further during 2026, McMahon says.
“Excluding alternatives, therefore capturing mostly equity trusts, the sector is trading on a single-digit discount at around 9 per cent on average, while the whole sector including alternatives is over 3 percentage points wider,” he adds.
“It’s also notable that returns from markets were very good last year, while rates available on cash accounts are significantly lower than 12 months ago.
“Both factors should encourage retail investors into the market, and there aren’t as many trusts to take their money after the corporate activity of the past couple of years, so the technical picture is looking good.”
2025 saw a record number of 27 completed mergers, acquisitions and liquidations, according to the AIC, up from 24 in the year before.
Meanwhile, share buybacks increased by 36 per cent to £10.22bn, compared with the previous record of £7.51bn in 2024.
Conway at Hawksmoor also says he thinks discounts are at the wider end of their historic range and that it is “very unlikely” they will widen further this year.
“I think the balance of probability suggests that they will go narrower . . . we’ve got one major headwind removed in the form of the [Financial Conduct Authority’s] policy statement on the consumer composite investment rules.”
The regulator’s CCI rules introduce several important changes to account for the unique characteristics of investment companies, says Milosz Papst, director of content for investment trusts at Edison.
“Costs related to gearing and maintenance of real assets are excluded from the ongoing costs figure.
“For funds investing in closed-ended funds, the ongoing costs of underlying closed-ended funds must be disclosed but need not be aggregated into the investor fund’s OCF, addressing prior ‘pull-through’ double counting.
“Transaction costs are also excluded from ongoing cost figures and are disclosed separately.”
The potential of pensions
But for investment trusts to trade at a premium on average would require a new source of demand, says Conway.
“I think that with the existing constituency of investors, it’s very hard to see that,” he says.
“The only way we’re going to see a premium emerge with the existing constituencies of investors is via restriction of supply, and that’s what we’re seeing at the moment.
“I think it’s very hard to imagine retail investors having enough demand to shift the balance that much in the sector’s favour. A much more likely constituency of investor I think could be pension funds . . . the source of that [demand would] be, I think, via the pension schemes bill.”
As the AIC notes, the bill will empower the government to compel pension schemes to invest a percentage of their portfolios in private assets. In the current version of the bill, this would not be met by investing in listed investment companies holding private assets.
“If investment trusts were to become permissible securities, that would be a huge win for the sector, which could prompt an increase in demand for investment trusts that could help narrow discounts,” says Conway.
“I don’t want to understate how important that could be. That could be the most important legislative change for a century for the sector.”
‘Discounts are never red flags in themselves’
While the AIC’s research shows a 53-year history of average discounts, separate analysis by AJ Bell in June 2025 found that 24 investment trusts were trading at a premium, up from 19 trusts year on year.
Common themes among trusts trading at a premium included income, a record of outperformance and those offering “unique, unusual or scarce” assets, according to the investment platform.
But discounts in themselves are “never red flags”, says McMahon at Kepler, although he says key things to consider include poor corporate governance, or very concentrated shareholder registers that might prevent actions to close a discount.
“Another thing to be wary of is leverage,” he says. “Highly geared trusts will see the value of their net asset value fall by much more than any portfolio writedown: so a discount might narrow in the wrong direction with a relatively minor writedown.
“On the positive side, a sector, country or asset class which is out of favour is unlikely to be out of favour for ever, so could reward patience even if there isn’t an obvious catalyst on the horizon.
“The presence of professional activist investors is something else that could build confidence that a discount will narrow in the right way.”
Chloe Cheung is a senior features writer at FT Adviser