Where is the love?

Financial advisers will have responded to news of the demise of the British ISA with a wry smile. The new Labour Government has let it be known it will not proceed with its predecessor’s plan for an additional individual savings account (ISA) allowance to encourage investors to buy UK shares. That deprives advisers of a potential opportunity to discuss with clients – but most intermediaries were underwhelmed by the British ISA when it was unveiled in the Spring.

Still, the problem that underpinned the thinking behind the British ISA remains. UK shares are unloved – both domestic and international investors, whether retail or institutional, continue to prefer opportunities in other global markets. UK equities, by international comparisons, remain undervalued. And British companies do not always see the UK stock market as a good option for raising money.

The investment trust sector is this story in a microcosm. Data from Dragon Capital reveals that shares in 90% of investment trusts are currently trading at a discount to the value of their underlying investment. Almost a third of trusts now trade on a discount of more than 20%. Across the sector as a whole, discounts haven’t reached these levels since the global financial crisis more than 15 years ago.

There are a bunch of reasons for this. Investment sentiment has not been conducive to investment in the sector, particularly when interest rates were rising. The increasing size of wealth management firms has prompted fears about liquidity in the investment trust sector. Misleading cost disclosure regulation hasn’t helped.

Broadly, however, all these factors track back to the same point. Just as with the UK stock market as a whole, investors have fallen out of love with investment trusts.

Would the British ISA have helped? Maybe, at the margins, since investment trusts are listed on the UK stock market and would, therefore, have benefitted from increased appetite for this market. That said, it was never clear if all investment trusts were going to be included in the new regime – it might have mirrored the old personal equity plan (PEP) rules, where investment trusts only qualified if they held 75% of their portfolios in the UK.

Still, in the absence of additional support, investment trusts are going to have to take responsibility themselves for winning back hearts and minds.

To be fair, many are doing exactly that. Share buybacks stand at record levels, as does corporate activity, with trusts increasingly looking to merge to provide the scale many investors are looking for. Charges continue to fall, and underperforming managers are being replaced by investment trust boards that are working hard on behalf of shareholders.

There is no silver bullet. Above all, with investor sentiment still mixed to say the least, investment trusts are swimming against the tide. Every piece of disappointing news has a disproportionate impact; good news seems to go unnoticed.

And yet, the sector’s selling points remain undiminished: a strong track record of long-term investment performance, competitive charges, a structure that offers opportunities to explore new asset classes, and a governance framework that prioritises the interests of shareholders. You can also add financial planning flexibility to that list – particularly given the advantages investment trusts offer for investors who need predictable flows of income.

For all these reasons, there is every reason to look forward to recovery in the investment trust sector. The British ISA was a gimmick that would have offered only a short-term boost at best, but its abandonment does not damage the long-term case for investment trusts.

In the meantime, while we wait for recovery, some advisers will undoubtedly spy an opportunity. It’s not often that you get to buy investment assets at such chunky discounts. This level of value is worth at least a look.