Stars may be aligning for investment trusts

Financial advisers haven’t always embraced the investment trust industry. For many years, the regulatory backdrop was an obstacle; investment trusts, unlike other types of collective fund, were unable to pay commissions to advisers who recommended them to clients. In addition, some advisers have worried about the relatively small size of so me investment trusts, or focused on costs, where disclosure rules have until recently caused funds problems.

But for advisers surveying the investment landscape for client opportunities in 2025, there are good reasons to consider trusts over other types of collective investment vehicles. After a tough period, this could be the year in which investment trusts get their mojo back.

Fundamentally, the case for considering investment trusts for exposure to a particular market or asset class remains strong. Their long-term performance record is attractive, with individual funds very often exceeding the returns achieved by their open-ended equivalents; the fact investment trusts can take on gearing is particularly helpful here.

Their record on income is also impressive, which could be invaluable in a year that is expected to see interest rate reductions. Investment trusts are unique in being able to hold back some income in strong years to boost dividends in leaner times. The list of Dividend Heroes should be essential reading when researching the trusts that pay a consistent income.

As for cost, investment trusts have a legitimate argument to make that they are often more competitively priced. While the disclosure rules have made comparisons more difficult, investment trusts have often been able to undercut other vehicles. And many funds have cut their fees over the past couple of years and continue to do so.

Stepping away from these fundamental arguments for considering investment trusts, it is also possible to see 2025 as a particularly good time to take the plunge.
For one thing, the sector continues to offer bargains. Shares in the average investment trust currently trade at a discount to the underlying assets of close to 15%. That represents an opportunity to buy assets on the cheap – and, as discounts narrow, to get an additional boost to performance.

Also, as investment trusts strive to assert their relevance, many funds are working hard to deliver shareholder value. They’re reducing their fees and reviewing investment policies. They’re buying in their own shares. Some are taking more radical action, replacing their investment managers or even pursuing mergers with other funds. All of this should support valuations in the sector and lead to a narrowing of discounts.

Another vital point to make is that investment trusts offer active management.

One reason many trusts have struggled over the past couple of years is that investors have embraced low-cost tracker funds that passively follow the market up and down; record sums flowed into such funds last year. Now, however, there is increasing concern that these passive funds are over-exposed to a handful of companies – particularly the big technology businesses that have grown at such enormous speed over the past few years. In 2025, an actively-managed investment trust could therefore be a way to improve diversification.

Equally, many advisers are now keen to explore opportunities for clients away from the stock market – in areas such as infrastructure, private equity and real estate, for example. Here, too, investment trusts have a good story to tell – they offer a liquid route into these alternative asset classes that doesn’t require investors to tie up their cash for extended periods. Many advisers will see virtue in that.

Are investment trusts the right option for all clients? Of course not. Advisers will naturally continue to worry about issues such as discounts, fund sizes and performance. However, while the past couple of years has seen lots of talk about the demise of the sector, the narrative going into this new year feels more positive once again. For both advisers and their clients, opportunity knocks.