Investment trusts fight back

Is the tide turning for investment trusts? David Prosser thinks so.

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It’s always darkest just before dawn. At the end of last year, many investment trusts were on their knees, battered by unfavourable market conditions and a seeming loss of faith – particularly among institutional investors. But after a woeful year of performance in 2023, investment trusts bounced back strongly during the first half of 2024, with the sectors that had previously struggled most leading the recovery.

The average investment trust delivered a share price return of almost 8% over the six months to the end of June, but many did far better. The technology sector led the way with a return of 28%, but growth capital and private equity weren’t far behind, both turning in more than 20%.

“Investment trusts bounced back strongly during the first half of 2024, with the sectors that had previously struggled most leading the recovery.”

David Prosser

David Prosser

What lessons should we learn from this resurgence? There are several.

First, the way in which investment trusts have bounced back this year underlines the importance of that basic rule of investment – that you must always look through the market’s ups and downs to take a long-term view. Anyone who panicked and sold their investment trust holdings at the end of last year may have turned paper setbacks into real-life losses – and then missed out on the recovery.

A second takeaway is that the structure of investment trusts creates additional opportunities. Many investors feel uncomfortable that the share price of a trust will typically trade at a premium or discount to the value of the underlying assets; this is a function of the closed-ended nature of the funds. Sometimes, however, those valuations get completely out of sync with reality, and investors can benefit. Some of this year’s very strong performance by private equity funds, for example, reflects the fact that they began the year trading at very high discounts. But these have now narrowed, meaning returns for investors are boosted in two ways – a rise in the value of the underlying portfolio, and an additional rise in the share price as the discount to the underlying portfolio reduces.

Lesson number three is that investment trusts are not simply hostages to fortune. Even leaving aside the asset allocation and stock picking decisions made by managers, there are actions that the trust’s board can – and do – take to support investors. Indeed, they are duty-bound to explore all such possibilities. The first half of the year saw record numbers of share buybacks by investment trusts, which narrowed discounts and underpinned stronger performance. Corporate activity, including mergers and acquisitions, was unusually high, and several trusts cut fees. All of which played a part in the sector’s recovery.

Clearly, investment trusts still face challenges. Like all collective funds, they operate in volatile markets that may yet fall away once again.

Nevertheless, the first six months of 2024 give plenty of reason for optimism about what lies ahead. Rumours of the demise of investment trusts look, once again, to be premature.