A 20% return in 4 months? I'm riding the investment trust wave
It is a mantra that needs little explanation. Try to buy when prices are low and avoid selling at a loss if you can (after all, you only crystallise a loss when you sell an asset). Traders do this on a daily basis, but long-term investors typically consider 'time in the market', rather than timing the market, to be the best way to ride out losses and ultimately make a profit.
Since I'm invested for the long term, I lean away from trying to time the market. My diversified portfolio in theory should tick along nicely in the background, with enough exposure to different regions and sectors to weather short-term market movements.
So I don't buy and sell based on headlines — usually. But this month has been an exception. This is because the Downing Renewables & Infrastructure trust, which invests in renewable infrastructure in the UK and northern Europe, has quickly become my best performing investment.
I bought £500 of shares in a portfolio reshuffle in March, when the price was about 82p a share. Today it's worth just over £1 a share — a 20 per cent return in a few months.
The jump is a result of the fact the trust, which had returned 6 per cent year-to-date in mid-June, is set to be bought and privatised by its biggest shareholder, Bagnall Energy, in a £175 million deal. The move places this price tag on the trust's assets and gives shareholders like me the right to £1.02 a share.
My £500 investment is now worth about £600 in cash. Winner, winner for me — and a good sign for the investment trust sector as a whole.
Investment trusts are similar to investment funds in that they aim to make money for their investors by buying shares and other assets. The difference is that unlike investment funds, investors buy and sell shares in investment trusts on the stock exchange the way they would Lloyds Banking Group or Microsoft. This means that the price you get for your investment when you sell is generally determined by what someone is willing to pay for it on the open market.
The popularity of investment trusts (also known as investment companies or closed-ended funds) boomed in the 2010s, but the past few years have been tricky for the sector. There has been a prolonged spell of poor performance; the market was flooded with small trusts that struggled to last, and discounts widened massively.
In the investment trust world, a trust is trading at a discount when its assets are worth more than the share price of the trust. It's a touch confusing, but an investment trust has two prices: its net asset value (NAV), which is the value of its investments, and its share price, which is the price you pay to buy shares in the trust.
If a trust's NAV is worth more than its share price, it's trading at a discount. This usually means that the trust is out of favour. If the opposite is true, it means investors are willing to pay more than the trust's assets to buy shares, so the trust is in demand.
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A discount is not necessarily a bad thing, especially for new investors who may be able to bag a deal. But in January a whopping 322 of the 345 trusts listed on the website of the Association of Investment Companies were trading at a discount. Some had discounts as wide as 50 per cent, and the average at the end of 2024 was 15.3 per cent.
This pointed to a general dampening of investor sentiment towards the investment trust sector.
But the tide could be turning. For the first half of this year, the average discount narrowed to 13.9 per cent. Downing's buyout was one of six mergers and acquisitions to boost the price returned to shareholders. The Warehouse real estate investment trust is set to be bought by Blackstone, a move that will increase its share price to from 82.4p to £1.13 — a 39 per cent uplift. The Harmony Energy Income trust sold its entire portfolio to Foresight for 92.4p a share, which was about 80 per cent more than its shares were worth last year.
Share buybacks, where a trust buys a portion of its shares to reduce the number of them in the market and boost the price for existing shareholders, are at a record high. There were almost a third more buybacks in the first six months of this year than there were in the first half of 2024, according to the Association of Investment Companies.
Nick Britton from the association said: 'Wide investment trust discounts often spell opportunity for investors. This opportunity can be realised in different ways, such as the discount narrowing thanks to improving market sentiment; a merger or acquisition; or activist investors buying up deeply discounted trusts.
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'In the past year we've seen all three of these. Given that the average investment trust discount is still in double digits, these trends probably have further to run.'
It's not a slam dunk, but the sector is certainly moving in the right direction. Several trusts that have discounts of 10 per cent or more have stated their goal to narrow their figures to single digits, which should give investors a degree of hope that share prices will start to move in the right direction.
So, I'm going to put my money where my mouth is and reinvest the £600 in another investment trust — preferably one with a wide discount today that's on its way to narrowing. The question is, which one to choose?
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