Double-digit investment trust discounts can mean higher returns over following five years
Investing when the average investment trust discount is more than 10% may lead to significantly better returns over the subsequent five years, according to new research from the AIC.
Investing when the average investment trust discount is more than 10% may lead to significantly better returns over the subsequent five years, according to new research from the Association of Investment Companies (AIC).
The AIC’s analysis of investment trust returns since 2008 shows that when the average discount exceeded 10%, the average investment trust generated a return of 89.3% over the following five years1.
However, when the average discount was less than 5%, the average return was 56.1% over the next five years.
In annualised terms, investing at a wide discount led to returns of 13.6% over the following five years, compared to 9.3% when investing at a narrow discount – a difference of more than four percentage points (see table below).
The analysis is based on 128 five-year periods, each ending at a month-end, between June 2008 and January 2024.
The discount of the average investment trust is 11%, having narrowed from 17% last October, the widest level since the global financial crisis.
| Average investment trust discount at beginning of five-year period | |||
|---|---|---|---|
| Wide discount (>10%) |
Mid discount (5-10%) |
Narrow discount (<5%) | |
| Number of five-year periods analysed | 39 | 28 | 61 |
| Average investment trust return over five years | 89.3% | 70.3% | 56.1% |
| Average investment trust return over five years, annualised | 13.6% | 11.2% | 9.3% |
Source: theaic.co.uk / Morningstar (ex VCTs)
Nick Britton, Research Director of the Association of Investment Companies (AIC), said: “While 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.”
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Notes to editors
- Source: theaic.co.uk / Morningstar. Based on analysis of 128 five-year periods with the first period ending in June 2013 and the final period in January 2024 (all periods start and end at a month-end). The start date was determined by the availability of cum-income, fair-value discounts which are not available before June 2008. All data excludes VCTs.
- The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 336 members and the industry has total assets of approximately £267 billion.
- For more information about the AIC and investment trusts, visit the AIC’s website.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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