Investment Trusts: The Closed-End Advantage for Long-Term Investors

The investment trust is one of the oldest investment vehicles in existence. The Foreign & Colonial Investment Trust, launched in 1868, is the world's oldest collective investment vehicle still operating today. Over 150 years, the structure has proved its durability — and its structural advantages over open-ended alternatives have become more, not less, relevant in a complex market environment.

Yet investment trusts remain underappreciated by many retail investors, who are more familiar with the open-ended OEIC and unit trust structures marketed by most fund platforms. This guide explains how investment trusts work, why the closed-end structure matters, how to interpret discounts and premiums, and how to navigate the major sectors.

What Is an Investment Trust?

An investment trust is a company listed on a stock exchange. The company's sole purpose is to invest its assets — in equities, bonds, property, private equity, infrastructure, or other asset classes — on behalf of its shareholders.

Investors buy shares in the trust through a stockbroker or investment platform, just as they would buy shares in Tesco or BP. The trust's shares are traded on the London Stock Exchange during market hours. When you sell, you sell your shares to another investor — you do not redeem units from the fund manager.

This "closed-end" structure is the defining feature. The number of shares in issue is fixed (absent corporate actions such as share buybacks, placings, or rights issues). The fund manager knows exactly how much capital they are managing and is not forced to sell assets because investors want to redeem.

Discounts and Premiums: Buying £1 of Assets for Less

Because investment trust shares trade on the stock exchange based on supply and demand, the share price can — and frequently does — diverge from the Net Asset Value (NAV) per share.

When demand for the trust's shares falls below supply, the share price can drop below the NAV per share. The trust trades at a discount. A 15% discount means you are buying £1 of underlying assets for 85p. When a trust trades at a 10% discount and subsequently re-rates to par (zero discount), the investor gains 11% simply from the discount narrowing — before any move in the underlying assets.

When demand exceeds supply, the share price can exceed the NAV — the trust trades at a premium. Buying at a premium means you are paying more than the underlying assets are worth, which is a disadvantage.

The sector average discount across the investment trust universe in early 2026 was around 14–18% — at the wider end of the historical range. This reflects several factors: rising interest rates in 2022–2023 created alternatives to income-generating trusts; the popularity of open-ended funds and ETFs has diverted retail flows; and some discount widening reflects genuine fundamental concerns about specific sectors (office property, for example).

The discount creates a meaningful asymmetric opportunity — but it is not automatically the same as cheap. A trust can trade at a persistent discount because:

• The underlying manager has underperformed
• The underlying assets are genuinely impaired
• The discount is structural because the asset class is illiquid and investors require a discount to hold the trust
• The board has failed to act to narrow the discount (through buybacks or other mechanisms)

Sophisticated discount analysis involves understanding whether the discount is cyclical (likely to narrow) or structural, and comparing a trust's current discount to its own historical average.

Structural Advantages Over Open-Ended Funds

The closed-end structure delivers several meaningful advantages that open-ended funds cannot replicate.

Gearing. Investment trusts can borrow money to invest — leverage the portfolio. OEICs cannot borrow to invest (within UK UCITS rules). In a rising market, gearing enhances returns. A trust with 15% gearing benefits from 115% of the market's upside on its equity allocation. In a falling market, gearing amplifies losses — so it is a double-edged sword. Long-term structural gearing at reasonable cost has, on average, been accretive for investment trusts.

Income smoothing. Under the tax rules governing investment trust status (which require at least 85% of income to be distributed), investment trusts can retain up to 15% of their annual income in a revenue reserve, rather than distributing all income to shareholders. This allows the board to maintain or grow the dividend in years when portfolio income dips — drawing on reserves built in better years. Many investment trusts have decades-long records of consecutive annual dividend increases precisely because of this income-smoothing mechanism. OEICs must distribute virtually all income each year, making their distributions volatile.

Illiquid asset investment. The closed-end structure makes investment trusts the natural vehicle for illiquid assets: private equity, infrastructure, property, private credit, and venture capital. When an OEIC invests in illiquid assets, it faces a structural mismatch — investors can redeem daily, but the underlying assets cannot be sold at speed without significant price impact. During the 2019–2020 commercial property fund suspensions (M&G, Columbia Threadneedle), OEIC property funds were forced to suspend dealing when redemptions overwhelmed their liquid cash buffers. An investment trust investing in the same properties has no such problem — selling shareholders simply sell their shares to willing buyers in the market; the trust's assets remain intact.

Board governance. Investment trusts have independent boards of directors who represent shareholders' interests. The board can replace the fund manager if performance is poor — something shareholders of an OEIC have no equivalent mechanism to achieve. Boards also approve the trust's investment mandate, gearing policy, discount management policy, and dividend policy. Governance quality varies significantly between boards, but the structural accountability to shareholders is a genuine advantage.

The Association of Investment Companies Sectors

The Association of Investment Companies (AIC) categorises investment trusts into sectors, making peer comparison and sector analysis accessible. Key sectors include:

UK equity income. The City of London Investment Trust (managed by Job Curtis at Janus Henderson since 1991) has one of the longest consecutive dividend growth records of any UK investment company. Edinburgh Investment Trust (Liontrust Asset Management) and Merchants Trust (Allianz) are other significant players. These trusts provide exposure to UK dividend-paying equities, with income smoothed via reserves.

Global equity. Scottish Mortgage Investment Trust (Baillie Gifford) is the UK's largest investment trust by market capitalisation. It takes a high-conviction, long-term approach to global growth companies, with significant exposure to listed and unlisted technology and innovation businesses. Brunner Investment Trust (Allianz) offers a more balanced global equity approach. F&C Investment Trust (Columbia Threadneedle) is the oldest and one of the broadest global equity investment trusts.

Private equity. HarbourVest Global Private Equity, HgCapital Trust, ICG Enterprise Trust, Pantheon International, and 3i Group (which also operates as a PE investor itself) provide access to private equity returns through a listed vehicle. The sector as a whole has faced significant discount widening in 2022–2025 as rising rates reduced the appeal of long-duration, illiquid assets. For patient investors, current discounts represent a historically wide margin of safety.

Infrastructure. HICL Infrastructure (InfraRed Capital Partners) and BBGI Global Infrastructure invest primarily in social and public infrastructure (PFI/PPP hospitals, schools, roads, renewables) with government-backed contracted revenues. 3i Infrastructure invests in mid-market infrastructure businesses rather than pure contracted assets. Greencoat UK Wind and Bluefield Solar Income Fund provide renewable energy infrastructure exposure.

Property. The UK REIT sector within investment trusts covers logistics (Segro, Tritax Big Box, LondonMetric), retail warehouses, healthcare, and residential. The office sector has faced material headwinds from hybrid working trends.

Venture capital trusts (VCTs). VCTs are a specific category of UK investment company qualifying for significant income tax relief (30% upfront on investments up to £200,000 per year). They invest in early-stage UK companies. These are covered separately in the Global Investments guide to VCTs.

Alternative assets. Royalty and music-rights trusts, renewable energy, digital infrastructure (for example Cordiant Digital Infrastructure), and specialist credit (various structured finance trusts) represent the breadth of the investment trust universe. The sector also illustrates corporate-action risk: Hipgnosis Songs Fund was taken private by Blackstone and delisted in 2024, and Digital 9 Infrastructure entered a managed wind-down the same year.

The Discount as a Portfolio Construction Tool

For sophisticated investors, the investment trust discount provides a portfolio construction dimension unavailable with open-ended funds. When the sector trades at wide discounts — as in early 2026 — the NAV-adjusted cost of exposure to high-quality fund managers is lower than at any time in a decade.

One practical approach: use the AIC discount data (published daily on the AIC website) to identify trusts trading at or beyond their five-year average discount. Combine discount analysis with qualitative assessment of manager quality, board governance, and the underlying asset quality.

The reverse is also true: buying investment trusts at premiums (common during periods of strong investor sentiment) means overpaying. A trust trading at a 15% premium to NAV that subsequently de-rates to par will decline 13% even if the NAV is unchanged.

Costs and Fees

Investment trust ongoing charges (OCF equivalents) are generally competitive with active OEICs. Equity income trusts often charge 0.3–0.6% per annum at scale. Specialist trusts (infrastructure, private equity) tend to be higher (0.8–1.5%), reflecting the complexity of the underlying assets.

The comparison with ETFs is more nuanced: an ETF tracking the FTSE All-Share at 0.07% OCF is cheaper than a UK equity income trust at 0.5%. But the investment trust's income smoothing, gearing option, and potential for discount narrowing can more than offset the cost differential over a full investment cycle.

How Global Investments Can Help

Investment trusts offer sophisticated investors genuine structural advantages: access to illiquid asset classes, income smoothing, gearing, and the discount opportunity. Navigating the sector requires understanding discount dynamics, board quality, underlying asset exposure, and the interaction with the investor's broader portfolio.

At Global Investments, our advisory team can assist clients in identifying investment trust allocations appropriate to their income, growth, and liquidity requirements. We pay particular attention to discount analysis, governance quality, and the tax-efficient structuring of investment trust holdings within ISA and SIPP wrappers where appropriate.

Capital is at risk. The value of investment trust shares and the income from them can fall as well as rise. Investment trusts can use gearing, which increases both potential gains and potential losses. Discounts can widen as well as narrow. Past performance is not a reliable indicator of future results. This guide is for information purposes only and does not constitute financial advice.