Analysis by the Association of Investment Companies (AIC) has confirmed what readers of our weekly ‘Trust Watch’ know – buying listed closed-end funds on wide discounts can generate excellent returns.

With investment company shares on average still trading on double-digit discounts to the value of their investments after a sector-wide derating last year, the AIC’s research suggests this makes a good entry point with the likelihood of ‘significantly better’ returns over five years.

Average discounts and five-year returns

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	Wide discount (>10%)	Mid discount (5-10%)	Narrow discount (<5%)
Number of five-year periods	39	28	61
Average five-year investment company return	89.30%	70.30%	56.10%
Average annualised investment company return over five years	13.60%	11.20%	9.30%

Source: AIC/Morningstar 

Using Morningstar data, the AIC looked at 128 five-year periods ending at monthly intervals between June 2008 – when the financial crisis had begun but before the market crashed – and January 2024.

This showed that at the start of 39 five-year periods, when average share price discounts exceeded 10%, the average investment company went on to generate a shareholder return of 89.3% over the next five years. That’s equivalent to 13.6% a year.

That looks significant right now, with the average investment company discount – excluding venture capital trusts (VCTs) but including private equity giant 3i Group (III ) – standing at 11%, having narrowed from 17% during the market low of last October.

(Note: the average discount figures we quote from Winterflood in Trust Watch tend to be higher – around 15-16% recently – because they exclude 3i, whose double-digit premium currently skews the data.)

This compared to an average 56.1% five-year return, when discounts began at below 5% in 61 periods, and an average 70.3% in 28 periods, when discounts started in a 5-10% range. The annualised figures for both are 11.2% and 9.3% respectively.

Nick Britton, research director at the AIC, said although past returns don’t predict future performance ‘it makes sense that investing at wider discounts would lead to better returns’.

‘Not only are you buying assets on the cheap, but these periods of wider discounts often coincide with lower underlying valuations, giving the potential for a strong recovery when market conditions improve,’ he said.

Discounts widened last year to 2008 financial crisis lows as rising inflation and interest rates put the assets of real estate, infrastructure and private equity funds under pressure.

Meanwhile, investment companies overall fell out of favour in a ‘risk-off’ environment not helped by discriminatory cost disclosure rules that the AIC and others are seeking to change.