Letter: Investment trusts deserve same fate as the phone box

Your columnist Stuart Kirk says he was “astounded” by the number and vehemence of the responses to his article on the unsexy subject of investment trusts (“Your open-ended wisdom on closed-ended funds”, Opinion, FT Money, June 15). But Kirk should not have been surprised. The trusts have been as much a treasured part of British culture as red telephone boxes once were. The industry — which at £273bn is not small — deserves to go the same way.

Apart from cultural affinity, the allure of investment trusts is that they typically trade at a discount to the value of their underlying assets. But while you may buy cheap, you don’t benefit from the cheapness, since the trusts can be confidently expected to continue to trade at discounts, as they have habitually for several decades.

Optimists expect the trusts to use their excess cash to purchase their own shares in the market, which has the effect of raising the share price and narrowing the discount.

In practice this occurs relatively seldom. In 2023 the average trust discount expanded to the highest level since the financial crash, but less than half the trusts bought back their shares, at a combined total of a little over 1 per cent of the value of the sector. The trusts will always be reluctant repurchasers since the managers are paid a percentage of their assets under management, and repurchases shrink the size of the assets, and thus the fees.

Of course, the vast majority (often put at 90 per cent-plus) of active managers underperform the overall stock market over the long term, but investment trusts labour under additional obstacles against outperformance. For example their fees are high, their management structures cumbersome and the trusts’ economics do not permit the attraction of star talent.

Valuation is an issue too. Many trusts include some private equity or debt, the value of which they themselves estimate, a practice which is problematic enough in private equity managers, but is even more so in the case of non-specialists. There are also sometimes questions surrounding the valuation of the trusts’ own debt.

So, I demur at Kirk’s positive view on the sector. I accept that trusts trading at a discount to their asset value have the benefit of a dividend yield enhanced by the lower numerator, but this tiny advantage hardly offsets the drawbacks.

David Crook
CEO, Tail Wind Advisory & Management
London WC2, UK