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Purchases of investment trusts on adviser platforms fell by nearly a third in 2023 as inflation and interest rate rises battered net asset values.
Purchases totalled £948mn last year, down 28 per cent from 2022’s record high of £1.3bn, according to data from the Association of Investment Companies, a trust industry body.
Net demand for investment trusts on platforms such as Transact, Fidelity Adviser Solutions, M&G and 7IM was negative for the first time since records started in 2011, with sales exceeding purchases by £53mn. In 2022, net demand reached an all-time high of £474mn.
Investment trusts are a type of pooled investment which are listed on the stock exchange and have an independent board of directors to monitor performance and shareholder interests. They issue a fixed number of shares at launch and new issuance is controlled by the board and shareholders so they can take a longer term view and invest in illiquid assets.
Trusts can trade at a premium or discount to the value of their investments — according to the level of demand for the trust. If the share price is higher than the net asset value it is trading at a premium, and if the share price is lower than the net asset value it is at a discount.
According to Winterflood, in 2023 the sector average discount was 13.2 per cent and delivered a 4.9 per cent return — lower than the FTSE All Share performance of 7.9 per cent.
Nick Britton, the AIC’s research director, said: “Last year was challenging for investment trusts with the average discount reaching its widest level since the financial crisis. Our data shows there was both a lower volume of purchases on adviser platforms, and more selling, compared to the previous year — resulting in the first year of negative net demand we have seen since 2011.”
Discounts have not recovered so far in 2024, with the sector average reaching 14.6 per cent at the end of January.
Popular investment trusts which are trading at discounts include Scottish Mortgage at 14.71 per cent, Alliance Trust at 5.25 per cent and the City of London Investment Trust at 1.66 per cent.
Investment trusts’ performance has suffered due to inflation cutting into returns and high interest rates encouraging investors to pour money into government bonds.
According to Winterflood research analyst Elliott Hardy, many investors entered the sector off the back of the strong performance of trusts such as Scottish Mortgage during the pandemic and have since been “stung” by seeing those trusts’ discounts “widen out”.
“This has brought to light that they’re investing in a share price which can be quite volatile, and 4 to 5 per cent returns for gilts and money market funds has compounded that sentiment,” said Hardy. “Until the sector can show it can pull back discounts closer to par those investors will take more convincing.”
Global, flexible investment, infrastructure, UK equity income and UK smaller companies were the most popular sectors among those who did buy.
