What’s Happening with Discounts to Investment Trusts? And How Can Boards Help? 

As board directors, one of the principal duties is to uphold the interests of shareholders.

In recent times, Boards have faced pressing questions about the widening discounts seen across the investment company sector.

These discounts, the difference between the net asset value (NAV) of a company and the market price of its shares, are a barometer of investor sentiment and, sometimes, a source of concern.

The Current Discount Landscape

In the first half of 2024, we saw discounts widen across the sector. Many companies have witnessed shares trade at a greater discount than the long-term average.

Such movements are, undoubtedly, a source of frustration for both retail and institutional shareholders who monitor NAV and market values closely.

The underlying causes are both sectoral and cyclical.

Broadly, higher interest rates, ongoing geopolitical tension, and concerns about the economic outlook have influenced investor appetite and led many to favour more liquid, straightforward investment vehicles over closed-ended funds.

This external environment is something effective boards, continuously analyse.

What Can Directors Do?

Shareholders rightly ask what action their board is taking.

Boards have several tools at their disposal. Share buybacks are one, and we have seen Boards consider them actively. Buybacks can tighten the discount and send a strong signal of confidence in the underlying portfolio value.

However, as responsible stewards, Boards must balance buybacks ensuring adequate liquidity and maintaining the scale necessary to deliver investment returns efficiently.

Boards also question their fund manager and advisors: Are there strategic shifts needed in portfolio construction?

Should they enhance their communication to better articulate the long-term value offered, especially in the case of more specialist mandates which may be misunderstood or overlooked during volatile periods?

Sector-Wide Factors

Of course, it is not just a matter for individual boards. Discounts are generally wider across the sector than they have been for decades.

The reasons are nuanced, from structural shifts in the wealth management sector to the growth of alternative funds and exchange-traded funds (ETFs). There is also regulatory change, most notably the Consumer Duty regime, influencing behavioural change amongst advisers and platforms in ways which are still being evaluated.

The Path Forward

While macroeconomic factors are beyond the Board’s control, it is their responsibility to ensure they are proactive.

Regularly reviewing any discount management policy and maintaining an open dialogue with shareholders. Transparency and clarity on what Boards are doing and why matters now more than ever.

Closed-ended funds still offer access to unique asset classes, the opportunity for outperformance, and the benefits of a permanent capital structure.

A Boards role is to close the gap between NAV and share price where possible, and, equally, to maintain a long-term focus in serving the interests of all their stakeholders.

By actively engaging with shareholders, deploying the tools available to them prudently, and articulating the enduring value of their structure and strategy, Boards are determined to navigate through this period of wider discounts. In our experience of working with a wide variety of Boards they are committed to value creation and accountability – no matter the environment.

As a board director, ensuring that your company receives best-in-class support from your service partners is essential, particularly during times of market dislocation and wider discounts. JTC’s expertise, operational infrastructure, and proactive client service have enabled our client boards to respond confidently and efficiently in this uncertain environment, supporting both day-to-day operations and strategic discount management.

Our partnership provides our client boards with the practical tools and insights to fulfil their fiduciary duty and act in the best interests of their shareholders, regardless of market volatility.

If you would like to know more how JTC can support your company, please contact Susan Fadil.