The reasons behind the rise in investment trusts disappearing

European Opportunities Trust, managed by Alexander Darwall, is the latest departure from the investment trust universe. 

Darwall, a former head of European equities at Jupiter who left to found fund firm Devon Equity Management in 2019, has managed EOT since 2000. 

However, the curtain is now falling, with the board deciding to wind down the company, amid subdued performance. 

• Invest with ii: Invest in Investment Trusts | Top UK Shares| Interactive investor Offers

Earlier this year, when announcing that a strategic review would take place, the board said that it is “acutely aware of the disappointment that our portfolio’s investment performance has entailed for shareholders”. 

Investors have the option to merge into either JPMorgan European Growth & Income Ord or the new Liontrust open-ended LT European Opportunities fund. The latter is managed by Darwall, whose firm Devon is a subsidiary of River Global, which was subsequently acquired by Liontrust. 

A third option is a cash exit at a -2% discount to net asset value (NAV). EOT’s current discount is -6.5%. 

Investors who don’t make a decision will be rolled over into JEGI, which has the strongest NAV total return performance in the Association of Investment Companies (AIC) Europe sector over one, three and five years to 27 May 2026. 

Over those time periods, JEGI has delivered gains of 23%, 57% and 83% versus its benchmark (MSCI Europe ex UK Index) return of 19%, 44% and 56%. 

Why are more investment trusts joining forces? 

Over the past couple of years, investment trust mergers have increased, with five taking place last year and 10 in 2024, which was a record year. 

High-profile examples include Alliance Trust and Witan combining to create  Alliance Witan Ord, as well as European Assets merging with The European Smaller Companies Trust PLC.

Usually, mergers sail through the shareholder approval process, although a recent example of a merger coming unstuck was HICL Infrastructure PLC Ord and Renewables Infrastructure Grp. 

The uptick in mergers reflects investment trust boards becoming more size-conscious in a bid to try and win over more investors at a time when the sector’s out of favour.

A key driver has been consolidation within the wealth management industry, with such firms being big investors in investments trusts. As a result, fewer wealth management clients now control greater sums of money and, due to this, will invest only in investment trusts of a certain size for liquidity reasons (the ability to buy and sell easily). For small investment trusts, those with assets of below £300 million, it’s more difficult for larger investors to commit a large sum.

• The big trends shaking up investment trusts
• Don’t miss the next big IPO: get the latest IPO news and updates straight to your inbox

With a market capitalisation of £429 million, EOT is slightly above that threshold, but it was due to shrink by up to 25% owing to an expectation of undershooting a performance target it had set itself. 

As we’ve previously reported, there’s a growing trend of investment trusts putting in place performance-related tender offers. Breaking down the jargon, investors are offered an escape route if NAV performance undershoots a comparable index over a certain time frame.

Under a tender offer, a certain percentage of the share capital is made available to investors who wish to sell some of their holding. Tender offers typically offer exits at NAV or close to NAV. This therefore provides an exit route for shareholders at a better price.

In the case of EOT, it had set itself the target of equalling or exceeding its MSCI Europe benchmark over a three-year period to 31 May 2026. Failure to do so would result in up to 25% of shares being tendered at a discount of -2% to NAV. 

In addition, there was a continuation vote due to take place this year. 

The board said that it “acknowledges the ongoing performance challenges and considers that it is likely that the company will not meet the performance condition to 31 May 2026 under the company’s performance-related tender offer mechanism. The board is also cognisant of the three-yearly continuation vote to be held at this year’s annual general meeting.” 

• Ian Cowie: signs of hope for this investment trust giant?
• Fund ideas to play return to form of emerging markets

Ultimately, the bigger an investment trust, the greater the chance of higher demand due to the likelihood of it being on the radar of both retail investors and wealth managers. 

While retail investors don’t have their hands tied when it comes to smaller-sized trusts, and indeed there are some that are potentially under-the-radar gems, they should bear in mind that some small investment trusts have higher costs, including potentially higher dealing spreads.

Proof’s in the performance pudding

Investment trust demand has fallen over the past five years or so, reflected in discounts remaining at historically wide levels. This has piqued the interest of activist investor Saba Capital, which was - at the third attempt - successful in its campaign to remove the board of Edinburgh Worldwide Ord. 

In response, some investment trusts that Saba has built stakes in, including Smithson and Diverse Income, have changed tact by liquidating and turning into an open-ended fund. 

Interest rate rises, which have caused bond yields to rise, have played a key part. Given that investors can procure yields of around 4% to 5% from lower-risk areas of the bond market, there’s been less incentive for them to take on greater levels of risk elsewhere. 

In particular, this has reduced demand for many alternative investment trusts that pay an income, particularly those specialising in infrastructure or renewable energy infrastructure.

• Serious concerns raised about savers raiding retirement pots
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

The continued rise of low-cost tracker funds, particularly exchange-traded funds (ETFs), is another headwind. 

Ultimately, the proof is in the performance pudding, with investment trusts needing to demonstrate that they have some sort of edge versus the return investors can hope to achieve simply by owning the market via a low-cost index fund or ETF. 

Investment trusts also need to show that their investment approach, style, and holdings, are sufficiently different from a comparable index. 

In addition, they need to become more vocal about their advantageous structural differences over funds, such as the ability to gear, and having the flexibility to smooth income payouts over time. 

Share buybacks 

Share buybacks are a tool that boards have been using much more frequently over the past couple of years to attempt to contain or, better still, reduce discounts.

By reducing the number of shares in circulation, there’s less of an imbalance between supply and demand. In theory, this will reduce the trust’s discount, benefiting shareholders as the share price receives a boost as it narrows towards the value of the trust’s underlying investments.

For investment trusts with a discount control mechanism – a rule to stop a discount going over a certain percentage – share buybacks are often used. 

While buying back shares is a sign of confidence from a board perceiving that the discount the trust is trading on is unjust and too cheap, it’s no panacea. Buybacks won’t prevent discounts widening if there’s no demand for the shares.

Instead, performance is key and has the biggest influence on the overall total shareholder returns. Put simply, if the trust doesn’t perform well, it is likely to consistently have a high discount due to a lack of demand for its shares. 

For investment trusts that are failing to attract investors but carrying out share buybacks, this leads to shrinking assets and less liquidity for the shares in the future. 

As we’ve seen in recent years, boards are acutely aware of size and will act accordingly.