How YOU can cash in on the Investment Trust revolution

The investment trust sector, the custodian of £269billion of the nation’s savings, can trace its history back to 1868.

But 2025 is set to go down in the annals of this industry as the year when it faced what some saw as an existential threat.

The concern may have abated a little in past days. Nevertheless, investment trusts seem set for upheaval, in a shift that could offer opportunities for investors happy to take some risks.

In recent weeks, the deep-pocketed US activist investor Boaz Weinstein, founder of Manhattan hedge fund Saba, has launched an offensive against seven trusts, pledging to ‘rehabilitate’ them.

This week he was defeated in his attempt to take over the £1.2billion Herald Investment Trust – a victory for shareholder democracy.

However, Darius McDermott, managing director of broker Chelsea Financial Services, expects behavioural changes in the sector, despite what he describes as Weinstein’s ‘cavalier approach’.

Victoria Hasler, head of investment trust research at Hargreaves Lansdown says: ‘Behind the excitement and defensive action which Saba has generated amongst trust boards and managers, there is a degree of soul-searching happening too.’

Battles loom in the coming days for control of the other six trusts: Baillie Gifford US Growth, CQS Natural Resources Growth & Income, Edinburgh Worldwide, European Smaller Companies, Keystone Positive Change and Henderson Opportunities.

Weinstein also holds stakes in another 17 trusts. The often brutally outspoken Wall Street veteran accuses the independent directors of trusts – who should be the guardians of investors’ interests – of failing to ensure that the managers deliver decent results.

The Saba intervention is being seen as a warning to anyone with savings in a trust that they must stay informed or face the possibility that they will wake up to find that their money is being invested in a way that they have not chosen.

This comes against the background of a heightened focus on all 335 investment trusts, with talk that managers cannot afford to be complacent. There is even more speculation that there will be more trust mergers, and that other US suitors could be circling.

To date, Weinstein’s rhetoric – which includes dismissing criticism of his arguments as ‘jingoistic’ – has not been persuasive.

Quoted Data analyst James Carthew also points what he calls Saba’s ‘cherry-picking’ in its use of trust statistics.

But other predators may be more conciliatory in their pursuit of a bargain, having learnt from the Herald affair that it may be unwise to try to force an agenda on UK investors.

If you have stashed some of your Isa or other savings in a trust, you need to be aware of the possibility that your trust could be snapped up on the cheap.

These predators will be looking to take advantage of ‘discounts’, these are the gaps that have opened up between the share prices of some trusts and the value of their net assets.

At the end of 2024, about 90 per cent of trusts were at a discount. The average was 16 per cent.

Complex cost disclosure rules have made trusts look less enticing, exacerbating the size of discounts. But the Saba affair has provoked a debate as to whether trusts communicate effectively with investors.

Some management teams are excellent, but others seem to wish to maintain a certain old-school mystique, failing to provide reasons as to why they are not acting to reduce discounts through measures such as share buybacks. These reduce the number of shares in issue so, in theory, boosting the share price.

However, the apprehension provoked by the Saba Capital affair is starting to be replaced by a new resolve.

Hasler says that, if there is ‘proper introspection and action at this point’, investment trusts could prosper.

If you want to make the most of the new mood, there are various approaches. Brokers Peel Hunt say that rewards could flow from buying into trusts that have not yet been targeted by activists and waiting for the discounts to narrow – either because these members of the awkward squad have attracted attention to the trust, or because the managers have remedied the issue. 

This could also be the moment when you consider putting some of your safety-first cash into such long-established and widely recommended trusts as City of London – which holds a reassuring spread of UK household names and is at a discount of 1.7 per cent – and F&C, which is at a 7 per cent discount. Its portfolio is made up of American tech stars such as Meta (the Facebook and Instagram group), Microsoft and Nvidia.

This trust, which was founded in 1868, could be seen as having emerged stronger from its tussles with activists earlier this century. Activists may be trouble-makers, but sometimes that can be a good thing.

Another strategy is to concentrate on categories of trusts that are particularly unloved, but could gain a new following.

ENERGY

Renewable energy trusts, which own solar and wind farms, but often also battery storage facilities, stand at an average discount of 30 per cent. Higher interest rates are one factor behind this. The income the trusts offer has been less generous than the yields on government bonds.

But McDermott says that this could be ‘an opportune moment’ to take a closer look at these trusts. In some quarters, the belief is that their holdings could make them an alluring proposition for tech giants who must find new sources of supply for the voraciously energy-hungry data centres crucial to their operations.

For such reasons, Ben Yearsley of Shore Financial Planning says that US private equity giants like BlackRock could be eyeing these trusts in future.

Among the trusts that could develop a new fan base are Greencoat Wind and Gore Street Energy Storage, which is at a 50 per cent discount.

PROPERTY

McDermott argues that Reits (real estate investment trusts), which invest in commercial or residential properties, ‘offer compelling value and income potential, especially as interest rates begin to decline’. This sector was hard hit by higher inflation and interest rates. But the outlook now looks more benign.

Mat Oakley, director of commercial research at estate agent Savills sees reasons to be cautiously optimistic, contending that ‘prime shopping centres, retail warehouse parks, and substantial high street parades should all be buys in 2025’, adding: ‘Offices are my big call.’

More large employers are ordering workers back into the office and the supply of new premises in the super luxe office category and less showy accommodation may not be sufficient to meet demand.

The experts’ Reit pick is TR Property Investment which is at an 8 per cent discount. Its portfolio encompasses the German apartment company Vonovia and the mall operator Unibail-Rodamco-Westfield. It also has a stake in mega-warehouse specialist Londonmetric, another Reit.

JAPAN

Japanese stocks are forecast to reach record highs in 2025, as firms update their management style and deliver fatter profits.

Despite this, as Yearsley points out, there are discounts of about 15 per cent on both Baillie Gifford Japan – which backs groups like Sumitomo, SoftBank and Sony – and Baillie Gifford Shin Nippon, which backs smaller companies.

Note that activist investors are reported to be infatuated with Japan, having spent at least 1 trillion yen (£5.2billion) on stakes in all sorts of companies in 2024.

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