The thing about discounts…

Do discounts matter? It’s a question that investment trust watchers have long debated – and look likely to continue doing so in the weeks to come, with the average fund on course to end the year on a wider discount compared to where it began. The AIC’s data shows that at the beginning of December, shares in the typical fund traded at a discount of 15.2% to the value of its underlying assets. The figure on 1 January was 13.7%.

It's worth reminding ourselves what these numbers actually represent. This discount means that if you have an investment in the average investment trust that you want to sell, you’ll get 15.2% less than it is actually worth, as measured by the value of the underlying assets. 

Now, clearly, this doesn’t look great. Discounts can be a headache – partly because nobody wants their investment to be undervalued, but also because the possibility of a widening discount adds another element of risk to investing in an investment trust.

Equally, however, it’s worth working through why discounts exist. They are a function of the structure of an investment trust, which is a quoted company that issues shares; the company owns the investments that the fund manager makes, with the shares giving you an exposure to those underlying investments.

The share price on any given day depends on demand and supply for the shares in the market – and sometimes that gets out of sync with what is going with the investment portfolio. That’s when you get a discount – or less commonly a premium.

Those basics are important to understand because investing through this sort of structure has real advantages. You can buy or sell shares in the fund at any time you like on the open market, no matter how illiquid the underlying investments may be (how hard they are to buy or sell). In other words, investment trusts can open a world of opportunities.

The fund manager can run the trust without having to worry about whether investors are putting more money in or taking it out. And the company status gives you all sorts of governance protections – the trust must have an independent board, for example.

Looked at through this lens, many investors feel that discounts are a price worth paying in return for the advantages of the investment trust structure. All the more so in asset classes that suffer from liquidity problems – property, infrastructure, private equity and venture capital, for example. Investors in all these areas through other types of structure have been caught out in the past because they can be difficult to sell if investors want their money back in a hurry.

Discounts can also be buying opportunities. AIC analysis of investment trust returns since 2008 shows that when the average discount exceeded 10%, the average investment trust generated a return of 89.3% over the following five years.

However, when the average discount was less than 5%, the average return was 56.1% over the next five years.

It’s also important to remember that investment trusts aren’t simply passive prisoners of the market’s whims. There are steps they can take to manage their discounts. During 2025, investment trusts have bought in more of their own shares than in any previous year on record, which is one way to manage discounts. In addition, we’ve seen 10 mergers of funds, five liquidations and more than 30 instances of trusts cutting their fees.

The overall figures tell you that this hasn’t been enough to bring average discounts down; but the counter-factual here is that discounts might have been much higher without that action. And investment trusts – like all investment vehicles – have faced multiple headwinds this year, from the tough economic backdrop, with higher inflation and interest rates, to geopolitical volatility in a period of rising international tensions and electoral uncertainties worldwide.

The positive way to look at the data, therefore, is to say that investment trusts have weathered the storm and are in good shape to prosper as calm returns. We can’t be certain about what 2025 will bring, but discounts could narrow sharply if more favourable conditions endure.

In the end, this is a judgement call. Discounts – and premiums – are a fact of life in the investment trust sector. Investors need to feel comfortable with that and be confident that investment trusts are taking the issue seriously. But discounts aren’t just a negative story; they’re part of a wider narrative about the advantages of the investment trust structure.

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