Home Estate Planning Appetite for investment trusts has fallen to the lowest level in a decade. Could this be the beginning of the end for the sector?

Appetite for investment trusts has fallen to the lowest level in a decade. Could this be the beginning of the end for the sector?

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Investment trusts used to be a staple of UK portfolios, but they’ve fallen out of favour in recent years.

Numerous high-profile scandals like that of Home REIT and Hipgnosis certainly haven’t helped their image, but the sector overall suffered as demand for trusts has slowly dwindled.

In trust expert Winterflood’s annual survey of its clients last week, it found expected demand for the investment vehicles had fallen to the lowest level since the questionnaire began 12 years ago.

Only 63 per cent of respondents said they were planning to be net buyers of investment trusts this year, which when considering these are clients of an investment trust specialist, is certainly presenting some worries for the sector.

This is the lowest figure since Winterflood began their survey 12 years ago, down from 72 per cent last year and an average of around 80 per cent over the last few years.

These figures come after a rough year for the sector, as discounts have widened and performance has struggled.

While the entire sector produced a positive performance of 10.4 per cent during 2023, this falls to 4.6 per cent once star performer 3i Group is excluded. That’s compared to 19.5 per cent for the MSCI World Index.

Looking at a full dataset from the Association of Investment Companies, only 25 of the 382 trusts (6.5 per cent) in the dataset sit on a premium, meaning their market cap is above their total net asset value, while the average discount of all trusts is 10.9 per cent.

While investment trust fanatics will tell you that the best time to buy trusts is when they’re on a significant discount, as they’re ultimately cyclical, it can be hard to pull the trigger and buy when others are selling.

It’s hard to argue there is one single origin for the difficulties trusts have faced, but one of the largest seems to be that small trusts are increasingly falling out of favour.

Trusts, for their part, are trying to get around this issue. The recent spate of mergers over the last year led 2023 to be dubbed the ‘year of the investment trust merger.‘

In the Winterflood survey, only 62 per cent said they would invest in a trust smaller than £200m, compared to 80 per cent last year and 99 per cent in 2013.

Indeed, 64 per cent said that more investment trusts should be actively pursuing consolidation, up from 45 per cent last year.

Liquidity was also highlighted as a key issue by respondents, as a lack of liquidity in trust shares in the secondary market has proven a major constraint to many investors.

A total of 68 per cent said liquidity for trusts is worsening, up from 41 per cent in 2023 and just 21 per cent in 2022.

“The general trend is a preference for bigger funds, which is driven, in our opinion, by the growth in the largest wealth managers and consolidation within this industry,” said Winterflood head of research Emma Bird in the report.

London’s IPO problem is certainly not helping the sector either, as the survey found only five per cent were ‘very likely’ to support investment trust IPOs and secondary placings this year.

One respondent argued that despite discounts driving investors away from the sector, it might actually make more sense to buy trusts on the cheap than invest in an IPO and have to pay full price.

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