07/03/2024
Despite 2023 being a turbulent year for investment trusts, sentiment towards them grew amongst private investors. Many trust holders sought to take advantage of historically wide discounts and reaped the reward when they narrowed in the winter, proving that they can see through the fog and take a long-term approach to investing.
It is well known that 2023 proved a volatile period for investment trusts. Stubborn inflation, rising interest rates and persistent geopolitical tensions prompted the investment trust market to have a record-breaking year. Share buybacks were at their highest ever, we saw the most manager changes since 2009, and in October, the average discount of a trust reached the widest it had been since 2008 (16.9%).
Findings from the latest wave of Research in Finance’s annual UK Investment Trust Study (UKITS), conducted in November 2023 with over 200 investment trust holders, indicates that investment trust holders saw light at the end of the tunnel, when most didn’t.
Research shows a growing proportion of investment trust holders were ‘fans’ of investment trusts, preferring them to other types of investment (60% in 2023 vs 55% in 2022). In contrast, the proportion of those who stated they were ‘agnostic’ towards investment trusts fell (from 28% to 25%), as well as the proportion of see investment trusts as more specialist and only invest in them from ‘time to time’ (from 17% to 15%).
These results beg the question – despite investment trusts having their toughest year since 2008, why did sentiment grow?
The answer? Discounts.
When asked why they would invest more in investment trusts over the next six months, a growing proportion of trust holders named attractive discounts/ discounts widening to be a key reason. Over the past two years, the discounts on offer have quickly become the primary opportunity within the sector, with the proportion selecting attractive discounts increasing from 45% in 2021 to 85% in 2023.
On the face of it, wide discounts can appear daunting, presenting a barrier-to-entry to investing more in trusts. However, given that the share price, more often than not, is reflective of investor demand rather than the performance of the trust’s underlying assets, it is evident that many trust holders sought to capitalize on that opportunity.
And this opportunity was realised. With interest rates peaking in November, investment trust prices have climbed, and discounts have narrowed. The average investment trust now sits at a discount of 10.8%.
This result sheds light on how an investment trust holder thinks and behaves in comparison to the typical investor. Trust holders, in their sophistication, are aware of the benefits that a wide discount can bring and recognise the power of a trust to deliver over the long-term. As such, they are not perturbed by short-term volatility and are experienced enough to recognise that discounts represent an opportunity, as opposed to an obstacle.
With the outlook for investment trusts now appearing more optimistic, it will be fascinating to see what trust holders recognise to be the next opportunity in the sector.
How Research in Finance can help
UKITS is a bi-annual research study aimed at giving investment trust providers and their boards insight into how the market is developing, the impact of marketing and communication efforts, peer group analysis and potential opportunities to grow the investor base. Specifically, the research helps UK-based asset managers and investment trust boards to understand the changing attitudes to investment trusts, brand resonance, product awareness, sales and media coverage. There is a sense that investment trusts do not receive as much attention as they should by investors and industry players. This study aims to help providers and boards better understand and, therefore, address this issue.
We also offer bespoke studies. For more information, please get in touch with Mick Hrabe or Richard Ley. You can also call us on +44 (20) 7104 2235.
