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The number of UK investment trusts has fallen by nearly a fifth over the past four years as the industry comes under pressure from cheap index-tracking funds, higher interest rates and takeovers.
Investment trusts are companies whose shares trade on the London Stock Exchange. They pool investors’ money into one pot to buy and sell stakes in assets ranging from equities to infrastructure.
However, the number of trusts has fallen from 337 in 2021 to 275, according to the Association of Investment Companies, in a sign that the 150-year-old sector continues to face challenges.
“Many investors have questioned why they should pay higher fees for active management if fund managers aren’t regularly beating the market,” said Dan Coatsworth, analyst at investment site AJ Bell.
“That’s led to a rise in people switching from active to passive funds, much to the detriment of the investment trust world.”
Shares in many investment trusts have lagged behind the value of their assets, meaning they are trading at a discount to net asset value.
An investment trust trading at a wide discount might reflect investors’ concerns over performance or the outlook for the sector. However, some investors might view a discount as an opportunity to buy the shares.
According to the AIC, the average discount sits at 13.8 per cent which is an improvement from last year’s 15.2 per cent but worse than 2.6 per cent in 2021.
“Weaker demand for certain types of investment trusts have seen many companies stuck in a rut when it comes to trading on large discounts,” said Coatsworth.
This has led the boards of some investment trusts to merge with rivals to help boost assets.
“The same applies to the large number of sub-scale trusts on the market,” said Coatsworth. “Anything less than £200mn won’t attract interest from large investors amid fears they won’t be able to exit easily, so we’ve seen a wave of consolidation and trusts being wound up.”
There has also been a series of takeovers, which has contributed to the decline in trusts on the market. “Property is a hotspot as valuations have been depressed by the higher interest rate environment,” Coatsworth added.
The real estate investment trust Assura has recently received takeover interest from private equity firms led by KKR, the US investment house, as well as another bid from Primary Health Properties.
The AIC said there were 10 mergers last year, compared with four the previous year. Seven trusts were acquired last year, compared with two the previous year.
Higher interest rates have also weighed on investment trusts that have borrowed money to service their debt.
Richard Stone, chief executive of the AIC, said that “boards have worked proactively to deliver for shareholders”, with last year being a record one for mergers and share buybacks. “There has also been a number of acquisitions as buyers realise the attractions of investment companies’ undervalued assets.”
He noted that the consolidation of wealth managers has resulted in demand for larger investment trusts, as this makes it easier for investors with large pots of money to buy and sell.
“Investment companies have stood the test of time, having been in existence over 150 years and have always evolved to meet changing market conditions,” he added.
