Fund Focus: beware this investment trust ‘silver bullet’

Investment trust boards keen to vanquish a share price discount (or a pesky activist) have tried plenty of measures in recent years, and not always with great success.

This might explain why a more drastic gambit is gaining in popularity: ceasing to be an investment trust altogether.

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Smithson Investment Trust Ord (LSE:SSON) shareholders last week backed proposals to morph the trust into an open-ended fund, and seemingly with good reason.

The move, which follows a similar shift by Middlefield Canadian Income last year, converts it to a vehicle that trades at net asset value (NAV), eliminating the discount in one fell swoop and giving investors an uplift.

With discounts widespread and Saba Capital continuing to frighten boards, there could be more to come.

Two trusts, the UK multi-cap income fund Diverse Income Trust Ord (LSE:DIVI) and Alexander Darwall vehicle European Opportunities Trust (LSE:EOT), floated the idea of such action at the end of last week (13 February) alone.

But if this is one way to slay a discount, investors should remember that there is still a trade-off. In the worst instances, making the switch could wipe out some of the traits that justified a trust’s place in your portfolio.

Where it does work

We’ve previously observed that the Smithson conversion doesn’t seem to sacrifice too much in terms of characteristics associated with the trust structure.

The team didn’t use gearing to attempt to juice returns and the portfolio itself seemed pretty liquid, meaning the closed-ended structure isn’t needed to house the assets.

With its global “smaller company” remit, the median market capitalisation for a holding in the fund still comes to a whopping £6.1 billion.

Meanwhile, the fund doesn’t have really big position sizes, an area where trusts can be flexible but most open-ended funds cannot.

Turning to last week’s two candidates, it doesn’t seem that the Diverse Income trust would have that big a shift either.

The trust doesn’t use gearing, has small position sizes and already has substantial overlap with the open-ended fund run by the same team, Premier Miton UK Multi Cap Income B Inc.

As the table shows, there’s only a slim difference between the two when it comes to performance. They also have very similar dividend yields.

Source: FE Analytics, 13/02/2026. Past performance is not a guide to future performance. 

It’s perhaps a good rule of thumb that a trust could feasibly make the switch, were it to already operate in a similar manner to an open-ended fund.

That means investing in relatively liquid shares, not using gearing and not having enormous position sizes. But let’s not assume this silver bullet will apply in all cases.

From dividends to big bets: what we give up

Trade-offs still exist. With the Diverse Income example, it’s worth noting that as an open-ended fund it would have to pay out all dividends it received each year, rather than being able to hold some back and build a “reserve” if needed in leaner years.

This can help trusts protect their payouts in periods of dividend cuts and keep upping the amount they distribute to shareholders over the years.

In this case, Association of Investment Company (AIC) data shows that Diverse Income has grown its dividend by an average of 4% annually over five years. It is a “next generation dividend hero”, having raised payouts for 13 consecutive years.

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In Diverse Income’s annual report last year (to 31 May 2025) the board acknowledged the structural advantage of the revenue reserves.

As it put it: “In 2020-21, when many portfolio companies cut their dividends as a result of the pandemic leading to a decline in the trust’s annual revenue, this temporary setback was countered by drawing upon reserves built up in prior years, enabling the trust to continue to pay increased dividends. Since that date, the trust’s revenue has fully recovered, and its annual revenue and dividends have continued to grow.”

Bigger issues

The drawbacks of a switch are, of course, more obvious when trusts make good use of their structural traits in the first place.

This definitely applies to European Opportunities: it makes generous use of gearing, recently accounting for 15% of NAV, and would lose this opportunity to amplify returns in an open-ended vehicle.

The fund is also well known for its big bets, with the top holding having at times accounted for 15% (or more) of the portfolio.

This has admittedly been a double-edged sword: Darwall’s two massive holdings of recent years eventually turned disastrous, in the form of Novo Nordisk AS Class B (XETRA:NOV) and, even worse, German payments processor Wirecard, which collapsed in 2020 amid fraud allegations.

But investors may well still back a manager who can show such conviction.

Other differences

Diverse Income is not alone in having an open-ended “sibling”.

Multiple trusts, including Baillie Gifford names such as Scottish Mortgage Ord (LSE:SMT), Monks Ord (LSE:MNKS), Edinburgh Worldwide Ord (LSE:EWI) and Baillie Gifford US Growth Ord (LSE:USA), have open-ended funds run by the same teams.

That’s also the case for wealth preservation trusts like Personal Assets Ord (LSE:PNL), UK funds such as Temple Bar Ord (LSE:TMPL) and Fidelity Special Values Ord (LSE:FSV), and a smattering of others including Polar Capital Technology Ord (LSE:PCT).

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While some of these “sibling” pairs are pretty similar, the differences can illustrate how jumping from a trust structure to open-ended won’t always be feasible, were the trusts to need such an option one day.

An obvious issue here is the penchant the Baillie Gifford trusts have for private companies, something an open-ended fund would be unable to hold.

But other nuances are at play: Temple Bar managers Ian Lance and Nick Purves cannot make quite such liberal use of overseas shares when investing for the open-ended TM Redwheel UK Eq Inc R Inc, for example.

Some of these issues might simply be marginal for investors. But they do make a difference, and are worth considering before throwing in the towel on investment trust status.