Investment Trusts Face Survival Reckoning

Investment Trusts Must Leverage Advantages

Investment trusts represent one of the most effective mechanisms for building substantial wealth across extended periods. Nevertheless, numerous contemporary trusts fail to justify their existence. Certain ones remain too diminutive to achieve meaningful impact and suffer from insufficient economies of scale. Others neglect to fully capitalize on the distinctive benefits inherent in the investment company framework.

An investment trust operates as a public limited company, offering distinct superiorities compared to alternative collective investment options. Its closed-ended format, featuring fixed capital, eliminates concerns over fluctuating inflows and outflows of capital. This design proves ideal for managing illiquid assets and for utilizing borrowed funds to amplify investment returns. Furthermore, the supervisory role of the board of directors ensures that the investment manager remains accountable should the trust experience prolonged underperformance.

Nevertheless, this organizational structure presents two prominent challenges. Firstly, operational overheads are substantial. Maintaining an independent board of directors incurs significant expenses. Additionally, the appraisal and oversight of illiquid assets demand considerable time and financial resources. Compensating active investment managers has always been costly, becoming even more burdensome for trusts employing an in-house team rather than outsourcing to managers overseeing multiple funds. Collectively, these expenditures render many smaller trusts comparatively expensive when benchmarked against larger counterparts or open-ended funds pursuing analogous investment approaches.

Investment Trusts Need to Embrace Their Strengths

Consequently, investment trusts must actively exploit their inherent strengths to offset these inherent weaknesses. Leverage stands out as a prime example, contributing to why trusts have historically surpassed equivalent open-ended funds over prolonged horizons. Trusts typically secure borrowing at exceptionally favorable long-term interest rates. For instance, the Scottish American Investment Company issued multiple loan notes years ago, maturing as far as 2049, with interest rates ranging from 2.23% to 3.12%. Despite this potential, the majority of trusts underutilize this valuable capability.

Nick Train’s Finsbury Growth and Income trust maintains gearing at a mere 2.4%, even with its substantial size and the manager’s strong convictions. Therefore, investors, managers, and boards ought to evaluate whether the investment strategy would perform equivalently within an open-ended structure. For equity-focused approaches that eschew leverage and target liquid equities, the response is probably affirmative. In such cases, the supplementary costs associated with the investment trust format become unjustifiable. The recent announcement by Smithson Investment Trust to transition to an open-ended fund exemplifies this realization taking hold.

Investment Trusts Face Imminent Pressure to Adapt

The investment landscape is progressively acknowledging these dynamics. In 2025, five mergers involving overlapping trusts occurred, with another slated for early 2026, as reported by the Association of Investment Companies. Seven trusts, including real estate investment trusts, underwent privatization—though certain long-term holders expressed dissatisfaction with departures like BBGI Global Infrastructure. Moreover, 14 liquidations took place in 2025, marking the highest tally since 2016; one notable case involved Middlefield Canadian Income converting to an exchange-traded fund.

Positively, various trusts are implementing reforms. This year witnessed 40 instances of fee reductions, up from 32 in 2024 and 26 in 2023. Efforts to narrow discounts have intensified, though outcomes remain inconsistent. Nonetheless, many trusts require more aggressive actions while opportunities persist.

Investors ought to assess whether their held trusts merit continued market presence. If not, exploring superior alternatives may be prudent—unless activist interventions promise viable restructurings that could yield substantial gains.