If investment trust boards expected a quiet end to a tumultuous year, they are out of luck. Saba Capital, the US activist hedge fund — and sworn enemy of what it considers outmoded, poorly performing trusts — delivered something of an unwelcome early Christmas present last week.
In a letter to the board at Edinburgh Worldwide Investment Trust, Boaz Weinstein, Saba’s chief executive, announced the hedge fund’s aim to appoint a whole new board to the trust. When the board proposed a merger with Baillie Gifford’s US Growth Trust, Saba — which owns 30 per cent of the former and 29 per cent of the latter — derailed the tie-up.
Saba began its torment of the sector almost a year ago, when it launched its campaign to take control of what it called “the miserable seven”, a group of investment trusts with persistent wide discounts to their underlying net asset value.
Weinstein, who describes himself as the “voice of mom and pop investors” laid into “the boys’ club” and the sector’s “ecosystem of greed” during a fiery presentation in January.
So far, Saba has failed to oust the boards of the targeted trusts, but that’s not to say the sector has remained unscathed. As we come to the end of what might be called the “year of Saba” how have investment trusts changed — and, crucially, are they any better for investors?
There’s no getting away from the fact that investors’ interest in trusts has waned in recent years — the first were founded more than 150 years ago, and a sector does not get to that age without going through periods of seismic change.
“While at the end of the 19th century, these portfolios invested in breweries, diamond mines and insurance companies, today the strategies have evolved to infrastructure, renewables and high-growth sectors such as tech and life sciences,” says Katya Gorbatiouk, head of investment funds at the London Stock Exchange.
Their closed-ended structure allows fund managers to take a long-term position; they have the ability to gear — to borrow to invest — and their boards are independent. They can also reserve dividend income in good years to pay out to shareholders in bad years.
Trusts, which are listed on the London Stock Exchange, can trade at a discount or premium to the underlying net asset value (NAV) of the investments their portfolio holds. This is a mechanism that allows active buying and selling, and discounts can sometimes present attractive opportunities to bargain hunters. But it’s also a reason why not everyone is a fan of investment trusts.
“Saba is not a cause of the problem. It’s a symptom of what’s going on,” says Charles Cade, a non-executive director of two investment trusts, VEIL and Temple Bar. He cites widespread discounts and a lack of interest from private wealth managers in buying trusts as two causes of sector’s troubles.
Abnormally wide discounts have prevailed for more than three years — the average discount is now 14 per cent, according to data from the Association of Investment Companies. That’s less than their absolute low point of an average 19 per cent at the end of October 2023. But still wide compared with the average discount of 11 per cent in March 2020 as Covid arrived in the UK. Before Covid, it was more normal to find average discounts moving between 0 and 5 per cent.
Ollie Saiman, co-founder of wealth manager Six Degrees, says: “The disconnect between the price and the underlying NAV introduces another source of risk which is difficult to quantify — or sometimes even understand.”
Whether the age-old sector is in an “existential crisis” or just a “cyclical blip” depends on who you talk to. But even Richard Stone, chief executive of the Association of Investment Companies, which represents the sector, admits: “It’s been a challenging year.”
The sector, once called the “jewel in the crown of the City”, has been shrinking, albeit against a backdrop of the universe of listed companies also shrinking.
There were 279 trusts on the London market at the end of May 2025, compared with 337 names three years earlier, according to the AIC. That represents a 17 per cent decline and is mostly due to mergers and wind-downs in 2024 and 2025. Not all such mergers succeed. This week, a proposed tie-up between investment trusts HICL Infrastructure and Trig collapsed after institutional investors opposed the deal. But the overall trajectory is clear.
Another challenge for equity investment trusts is the popularity of index trackers. “These vehicles continue to grow and take share from traditional actively managed trusts by offering simplicity, very low fees and a unit price that is always at asset value,” says James Mowat, head of investment trusts at Liontrust.
For investment trusts to compete with passive investments, he and others stress the importance of offering differentiated portfolios that produce attractive, repeatable longer-term returns after all costs. But investment trusts also need to use the full suite of tools, such as gearing and dividend policy.
When they don’t, there’s little reason for the portfolio to be an investment trust. One example is Smithson, overseen by star fund manager Terry Smith, which was the largest ever launch of an investment trust, raising a record-breaking £822.5mn in 2018.
In November, the Smithson Investment Trust, also under pressure from Saba, announced it was abandoning its investment trust status and converting to an open-ended fund. The decision, which is subject to shareholder approval, is a response to the persistent discount between its share price and its underlying NAV.
Smithson follows Middlefield Canadian Income in adopting an open-ended structure, in Smithson’s case an open-ended investment company (Oeic), while Middlefield chose to become an active ETF. Analysts say there could be more to come.
The Smithson story has not surprised analysts, who point out that there wasn’t much point in Smithson being an investment company, since it had no gearing, no private investments and no derivatives. Terry Smith has said he agreed with Saba that change was required.
Strong performance has led to discounts narrowing in equity investment trusts. The sector has also benefited from investors’ rotation away from the US. So could investment trusts come back into fashion?
“The place to be over the past five years has been in the world index and very few trusts have beaten that,” says Peter Spiller, chief investment officer at CG Asset Management.
Global markets have largely shrugged off geopolitical worries and embraced the potential of artificial intelligence. Against this backdrop, the average investment trust has broadly held its own, delivering 8.65 per cent share price total return over one year to December 4, against 9.35 per cent average performance from open-ended funds.
Some point to the fact that if Saba sees value, retail investors should too. Stone says: “Activist investors are there to identify mispricing or economic opportunities. Isn’t that a good signal for other investors?”
Interactive Investor, a broker, reports the most popular investment trusts bought in October 2025 were Scottish Mortgage and Polar Capital Technology, which both focus on technology investments.
Customers were also buying City of London, famous for four decades of dividend increases driven by investing in UK companies, and Temple Bar, which focuses on “intrinsic value”, the process of buying a company’s stock for less than its true worth.
Investors will be hoping discounts prove cyclical. History certainly suggests they will. Stone says: “If you go back to the 1980s and 1990s, discounts were substantially wider than they are today. Also, discounts went wider after the financial crisis and bounced back.”
Doug Brodie, founder of adviser Chancery Lane, which specialises in portfolios of investment trusts, believes discounts are excellent news for income investors, such as retirees in pension drawdown. Dividends from some of the big income-paying investment trusts are exceptionally stable so the lower the price an investor can pay, the higher the yield.
He gives the example of one investor who bought Lowland shares for 40p in March 2009. He received a 2.65p dividend that year — a 6.6 per cent yield when “the sky was still falling”. Last year, those shares paid 6.425p dividend — a 16.06 per cent yield for that same investor.
For the sector truly to return to health, many analysts believe it has to overcome two more issues.
The first relates to cost disclosures. The investment trust industry has long been lobbying against the misleading “double counting” of ongoing charges when applying regulations to investment trusts that were really designed for open-ended funds.
Since 2018, this has made investment trusts appear artificially more expensive and less attractive to investors, particularly wealth managers and institutions. The regulator has given investment trusts a temporary regulatory concession from the cost disclosures. But investment trusts are still waiting to see what the final rules for the Financial Conduct Authority’s new Consumer Composite Investments regime will look like.
Peter Walls, Unicorn Asset Management, says: “It would be a travesty if the views of the entire sector were ignored.” But Stone at the AIC is “very optimistic” that the issue will be resolved before the end of the year.
The second issue is that investment trusts are excluded from the government’s pension schemes bill, which aims to encourage pension funds to invest in private assets. This is despite investment trusts’ proven record in investing in infrastructure, renewables and private markets. Peers in the House of Lords have called for the exclusion to be resolved.
“Pension schemes have not been big investors in investment companies,” says Stone. “But the listed closed-ended structure is the only one that has proved itself in these types of assets.”
In the end, to succeed, the investment trust sector needs to up its game, not only on lobbying but on marketing and education.
Gorbatiouk at the London Stock Exchange says: “What would help investment trusts reach scale is a proactive approach by pension schemes in building relationships with specialist asset managers, as has been a long-established practice in Canada.”
The consensus is that you can make good money out of trusts at this stage in the cycle, but nobody is heavily incentivised to market investment trusts.
When people invest in an open-ended fund they give the money directly to the fund manager who now has more funds, so more management fees. However, when an investor invests in a trust, they buy shares from existing investors, not from the fund manager, so the manager has less of a financial incentive to market the trust.
Big investment trust stakeholders and industry heavyweights among funds, analysts and advisers, have urged board directors to prioritise digital marketing and social media to attract new audiences. Boards have deployed tools such as share buybacks to close discounts but may need to be more innovative to succeed.
Although the sector faces a lot of challenges, analysts say it usually finds ways to endure. Spiller is in the optimistic camp, seeing “a good future for fewer but much bigger trusts”. But this is in the hands of the directors of “at least 200 trusts, where the board needs to take action because they have too big a discount or will be too small going forward”.
Cade still has all his money in investment trusts. “I still think it’s a great way to invest,” he says. But he and other fans of investment trusts will be watching developments closely.
Moira O’Neill has holdings in City of London investment trust