Should investment trusts win a place in your portfolio?

Kyle Caldwell: Hello and welcome to our latest live webinar, a 45-minute discussion about a particular investment topic. The focus today is on whether investment trusts should win a place in your portfolio.

Thank you for tuning in. I’m Kyle Caldwell. I oversee Interactive Investor’s fund, investment trust and ETF editorial content.

We’ve got a great panel today, but before I introduce them, a couple of housekeeping points. We’re going to have a discussion for around 20 minutes and then I’ll open up to Q&A.

If you have a question for the panel, head to Slido and type in the code 8804224. You can also scan the QR code on screen now, or ask questions in the YouTube comments.

Please keep in mind that this webinar is for educational purposes only and is not financial advice.

Let’s move on to our panel. To my left, we have Katya Gorbatuk, Head of Investment Funds at the London Stock Exchange. In the middle, we have Andrew Lister, Director, Portfolio Manager and Analyst at Lazard Asset Management. And at the end, we have Christian Pittard, Head of Closed-End Funds at abrdn.

Thank you for joining me.

Christian Pittard: Thank you very much.

Kyle Caldwell: Christian, could you start by giving a brief overview of what sets investment trusts apart from other types of pooled funds? There are certain bells and whistles that investment trusts have.

Christian Pittard: I think it’s all about performance. That’s what should really set them apart.

The three principal drivers are their perpetual nature, meaning they don’t have to buy and sell investments because of investor inflows and outflows. That also enables them to invest in more specialised securities, whether that’s smaller companies or less liquid instruments, which can generate higher performance. They can also take advantage of gearing, which over the long term can deliver improved performance.

The AIC recently published a comparison of sister funds, where the same portfolio manager is running an investment trust and an open-ended product. Seventeen out of 20 investment trusts outperformed their sister fund across all time periods, which I thought was compelling data.

Kyle Caldwell: Investment trusts have two parts: a share price and a net asset value, known as the NAV, which is the value of the underlying investments held in the portfolio.

Katya, what do private investors need to think about in relation to investment trust discounts and premiums?

Katya Gorbatuk: Firstly, I would say that a discount is not a flaw. It is a feature of investment trusts, and an important and unavoidable feature.

In an open-ended fund structure, such as an ETF, there is an embedded mechanism to create and cancel units on an ongoing basis. That affects the underlying holdings, triggering the sale or acquisition of holdings, and allows the fund to trade close to NAV.

But in a closed-ended fund structure, liquidity is achieved through trading shares. Selling shares does not affect the capital pool, which enables investment trusts to invest in the underlying assets in perpetuity, as Christian described.

One important thing that is often under-communicated about NAV is how much rigour and methodology goes into calculating and reporting it. For a listed equity portfolio, that calculation is more straightforward because it is based on available daily prices of the underlying equities.

With private assets, it is more complicated. It is subject to models with complex assumptions, and sometimes external expertise is used. But in all cases, the process follows accounting standards and the AIC’s recommended practices. There is also a regular audit of the NAV, and it is subject to oversight by the independent board, which is accountable for the robustness of the methodology.

In normal circumstances, the share price reflects investor sentiment about that NAV. I say “normal circumstances” because there were quite a few factors over the past few years that created an environment that could not be classified as normal market conditions.

That occurs when traditional sources of investor demand, such as long-term investors, multi-asset investors and wealth managers, are affected by factors that were not there previously.

For investment trusts, from 2022, multi-asset investors were subject to unfavourable — and, in the market’s view, unfair — disclosure rules. These were fixed in the final rules the FCA published as part of the overhaul and the creation of the new Consumer Composite Investments regime.

That issue is now fixed, and that investor base will need to be rebuilt. There is a process involved. For wealth managers, there is also a process to go through with the forthcoming consultation, and hopefully that investor base will be rebuilt in due course.

Finally, there is a huge opportunity to close discounts by accessing new sources of capital, particularly pension capital. Even though we have £3 trillion in pension assets in this country — the second-largest pool of pension assets in the world — pension funds still account for under 3% of shareholders in investment trusts. That is a huge opportunity for the sector.

Kyle Caldwell: Andrew, I’ve spoken to lots of private investors over the years and many of them like to try to pick up a bargain when it comes to investment trust discounts.

While it’s on a case-by-case basis, if a private investor is doing their homework and sees an investment trust trading on a particular discount, how can they judge whether that discount is a potential opportunity, whether it is normal, or whether there is a risk it could widen further?

Andrew Lister: I was given some advice a long time ago, which I still live by today: if you wouldn’t pay NAV for something, don’t buy it at a discount.

It’s like shopping in the sales. If you see an item of clothing that is 50% off, but you wouldn’t pay full price for it, why would you buy it at half price?

If a retail investor is looking at something trading at a discount, the key is not necessarily to spend ages trying to unpick why the discount exists, because discounts are complex. There are many reasons why they exist, why they might narrow, and why they might widen.

I would focus on the fundamental attraction of the assets the trust owns. If you like what you see and you want exposure to that asset class, manager or type of investment product, then the discount can offer a bargain.

Kyle Caldwell: And when it comes to investment trust premiums, is there a rule of thumb? Is there a certain percentage where investors should be wary of paying over the odds?

Andrew Lister: I think there is. You should embed a bit of caution in your decision if you’re looking at something for the first time and it’s trading at a premium.

Premiums typically emerge when assets or investment trusts are performing well. They’ve been performing for a long time, doing well relative to their benchmark and peer group, and the underlying asset class is performing. That can be sustained for many years.

On discounts, there is also a very big role for the board in managing the discount and stopping discounts becoming too volatile or too wide.

Some funds have strict mechanisms, which are worth looking into. You should find the detail in the annual report, and it should be communicated clearly by the chair. For example, trusts with zero-discount policies are unlikely to be available on a large discount because the trust should be systematically buying back shares if the discount reaches a certain level.

Spend time understanding it. But the bigger decision is whether you want to own the manager, the asset class and what is in the portfolio.

Kyle Caldwell: It has been mentioned that investment trusts allow investors to access illiquid areas of the market. Christian, could you talk a bit more about how the structure can be a better fit for that purpose?

Christian Pittard: As I touched on, the structure is well suited to holding those types of securities. That is harder to do in an open-ended or ETF format because of daily subscription and redemption rights.

Investment trusts can hold more specialised assets, whether that is real estate, smaller companies, private credit or any number of other asset classes. That enables investment trusts to offer strategies and capabilities you can’t get in other wrappers.

They are particularly well suited to offering specialised mandates, and they can also be enhanced with some degree of gearing, which over the long term can contribute to additional performance.

Kyle Caldwell: Andrew, investment trusts face a lot of competition. There are open-ended funds, ETFs, and some investors prefer to buy shares directly.

We see from our data that, particularly among younger investors, there is a bit more of a preference towards ETFs than investment trusts. What is your view on ETFs, where they sit in a portfolio, and how investors could potentially mix and match different fund structures?

Andrew Lister: I think the mix-and-match approach is a very sensible one.

We don’t use ETFs for our clients. We are purely invested in closed-end funds, investment trusts and similar structures. But if the investment trust universe has one shortcoming, it is that it can’t do everything for everyone.

There are asset classes that just aren’t represented in the investment trust universe. There are also very large asset classes where the investment trust universe is underserved. For example, given the size and relevance of the US in global markets, there is actually not that much product in investment trusts.

A large, liquid market like the US is probably one where investors could consider an ETF as a long-term core holding, where they are just trying to capture the beta of the market.

What investment trusts can offer alongside that is alpha. That can come from the structural benefits of the investment trust wrapper, the gearing, the ability to do more specialist things, and not having inflows and outflows constantly affecting the portfolio. It can also come from managers you can’t access through an open-ended fund or ETF.

So, ETFs for beta, investment trusts for alpha. And if you get the discounts right as well, that is another source of additional return.

Kyle Caldwell: Katya, another relatively newer competitor for investment trusts is active ETFs. Could you talk us through what an active ETF is and whether they are a threat to investment trusts?

Katya Gorbatuk: The overall ETF market has grown very rapidly over the past 25 years. If we take London as an example, from a single ETF in 2000, the market now has around 2,700 ETPs of different kinds, with assets under management of £1.8 trillion.

What was originally an index-based offering has evolved into a much wider proposition. There are different kinds of ETFs, and active ETFs are very much an emerging instrument and account for a lot of new issuance activity.

They arose out of the quest to deliver outperformance. Unlike traditional index-tracking products, in an active ETF, an asset manager adjusts allocations away from the benchmark based on their own convictions.

But it is worth saying that the features that make ETFs an outstanding asset class are also some of the reasons why ETFs can never replace investment trusts.

Their open-ended nature means they have to hold liquid underlying assets. That means they cannot invest in some of the assets investment trusts can hold. They are also low cost, which means that even in an active ETF, active management will never be at the same level as in traditional fully active investment funds.

What that means for investment trusts is that they need to sharpen their investment proposition. That proposition has to do with the underlying portfolios and the types of assets offered.

That includes smaller listed equities, AIM-quoted equities, equities traded on international exchanges, and illiquid private assets that can be offered in a closed-ended fund structure.

An important feature of investment trusts is long-term capital deployment, which is so important for areas that require long-term capital, such as infrastructure or scale-ups.

From the investor perspective, they get access to actively managed portfolios with the benefit of the liquidity, transparency and governance of public markets. That democratises access to assets that are traditionally available through private equity funds, which are inaccessible for most retail investors because they require very large commitments and lock up capital for five, seven or 10 years.

This is a unique proposition, and the opportunity is to sharpen that investment case and deliver it to the broadest possible investor universe.

Kyle Caldwell: As mentioned at the beginning, investment trusts have various bells and whistles. For investors completely new to this industry, they need to get their heads around those features: the ability to gear, the fixed pool of capital, and the fact that trusts can retain up to 15% of income generated each year in a revenue reserve.

An ETF is a simpler proposition on paper. Christian, how can we attract a younger generation to become more engaged with investment trusts?

Christian Pittard: We need to communicate and inform better as a sector. I don’t think we have delivered on that particularly well.

Events like this help — getting out there and telling the story. Fundamentally, it has to be about performance and investment returns.

There is information available if you know where to look. Interactive Investor does a great job of publishing information. The AIC, the industry body, also has a lot of information available.

One of the challenges, though, is that the industry has so much heritage. Some trusts are over 100 years old, and the names, which are a legacy of the trusts’ origins, don’t necessarily represent the current investment strategy.

You don’t have intuitive naming in investment trusts in the way you do in other wrappers. It would be unusual to launch an ETF with a name as detached from the strategy as some of these legacy trusts. The names have stayed, while the strategies have evolved. That makes information and communication more challenging, and I don’t think the industry is doing itself a favour in that regard.

Katya Gorbatuk: I would also add that part of the communication strategy has to be about explaining the value of active asset management in the context of investment trusts.

That means explaining how much work goes into sourcing these portfolios, managing them, continuously watching and managing risks, and identifying new opportunities.

Decoding what active management means for portfolio companies, investors and the economy at large has to be part of the communication.

Kyle Caldwell: Andrew, this might be a bit too simple, but is the proof ultimately in the performance pudding? Does an investment trust need to offer something sufficiently different from the alternatives?

Andrew Lister: Absolutely. It is about communication and then delivering performance, which is what Christian said at the outset.

The sector as a whole goes through cycles of doing really well, and then cycles where it does less well, with share prices underperforming because discounts are widening.

We had a lot of issuance in renewables and infrastructure when interest rates were very low. Lots of premiums then turned into discounts, which can mask the fact that some underlying assets are doing really well. It can also turn people off.

I often hear the sector described as the City’s best-kept secret. But you don’t want it to be a secret — you want everyone to know about it.

If you’re willing to put in the work and understand the nuances of the structure, you should expect to be rewarded with better performance. I think you can be, but you need to do your homework.

Kyle Caldwell: Christian mentioned earlier the data from the Association of Investment Companies on so-called sister funds — investment trusts managed by the same manager and following the same strategy as an open-ended fund. The 10-year data shows that around three-quarters of those investment trusts outperformed the open-ended funds.

In shorter time periods, is it fair to say that investment trusts are more volatile than open-ended funds because they have a share price?

Andrew Lister: Yes, they have a share price, but also many of the benefits we’ve discussed today cut both ways.

A discount or premium can enhance your return when it narrows, but it can harm your return when the discount widens.

Investing in less liquid assets is fantastic when it works well, and there are some great examples of that at the moment. If you own SpaceX, you’re probably feeling pretty happy about your private exposure. But if you’re a US investor in private credit, there have been negative headlines and concerns.

It is the same with small caps. The past decade has really been about large-cap growth. Small caps, in general, have not been delivering on the small-cap effect that made many small-cap vehicles so popular for so long, whether in the UK or Asia.

All these things can cut both ways. But over a 10-year period, you should expect these features to add value. In the short term, that can get lost, and it’s the noise that puts people off.

Kyle Caldwell: There are around 350 investment trusts, thousands of funds and thousands of ETFs.

Christian, what are your thoughts on how investors can cut through the noise and get the right blend of different strategies as part of a well-diversified portfolio?

Christian Pittard: You might be asking the wrong person because, as Head of Investment Trusts at abrdn, I am 100% invested in investment trusts.

But I think using investment trusts as an allocation to more specialised strategies makes sense, whether you’re looking at income or a particular asset class. It is more of a core-satellite approach.

You published some interesting data on Interactive Investor customer exposure to investment trusts. Your ISA millionaires — around 2,800 of them — were roughly a third invested in investment trusts, which was significantly higher than many people might have expected. Your average customer was around 15%, which is still a significant allocation.

I didn’t make the ISA millionaire category, but I’m in the 100% category. For most people, investment trusts are probably the specialised allocation — the alpha.

Andrew Lister: There are a lot of things in the investment trust universe that you just can’t access in any other way.

For a retail investor, if you want exposure to a hedge fund, the benefits of which should be diversification and delivering returns when other parts of your portfolio aren’t working, it is very difficult to allocate directly to hedge funds through other structures.

If you want high-yielding renewables infrastructure, real estate, private equity or specialised credit, there are many things you can’t emulate any other way. You should also be wary of funds with liquidity that tell you they can.

For a truly diversified portfolio, which is highly relevant at the moment because public equity indices are becoming more concentrated, I would say you almost have to look at a handful of investment trusts to get that extra diversification — perhaps not as your core holdings, but around the edges.

There are also vehicles that do that for you. If you look at diversified multi-asset investment trusts, you can find a few that are effectively a one-stop shop for that.

Katya Gorbatuk: If you look at areas where new capital is required, we are facing incredible demand for new infrastructure, upgrading infrastructure, protecting infrastructure with robust defence technologies, supporting innovative scale-ups, developing new pharmaceutical technologies and applications, space technologies, and more.

The demands of our time are immense, and this is an opportunity for investors to take a stake in future growth and the future economy.

Investment trusts offer a unique value proposition. ETFs are a big wake-up call to the sector, and some investment trusts may reconsider their structure. Some of that activity is already going on, and it is a normal process as the market evolves.

Kyle Caldwell: Let’s move on to questions submitted by listeners.

Before I do, just a reminder that if you’d like to ask a question, head to Slido and type in the code 8804224.

We’ve had a couple of questions related to Saba Capital, the US activist investor.

The first asks: how can the exchange and the Financial Conduct Authority improve regulation for investment trusts to prevent other investment trusts falling into the same circumstances that Edinburgh Worldwide has fallen into?

It’s well documented that Saba Capital requisitioned three meetings related to Edinburgh Worldwide, and in the third shareholder vote the board was removed and new board replacements were recommended by Saba.

So I think the question is asking how regulation can improve to stop the same requisition being called again.

Katya Gorbatuk: This is very much the question at the front of mind for the industry.

The FCA has already announced a forthcoming consultation on listing rules related to investment vehicles. Key points will include questions about board independence and conflicts of interest. This will be an opportunity for the sector to respond and provide its views, and hopefully there are many learnings to incorporate.

But I would reiterate that the issue we need to face and tackle is the availability of capital at scale — long-term capital.

There is a huge opportunity in the UK to tap into pension capital. There is a value-for-money framework embedded in legislation through the Pension Schemes Act. Thanks to the efforts of Baroness Bowles and Baroness Altmann, investment trusts are eligible as a wrapper for allocations to productive assets.

The Pension Schemes Act deals with historic underinvestment in productive assets, and investment trusts now qualify. Investment trusts need to take advantage of this favourable turn in legislation and restate their case to large pools of capital.

The specialist active management expertise is the key selling point.

Kyle Caldwell: Christian, do you have any further thoughts?

Christian Pittard: If trusts are trading at wide discounts, they’re not performing, and they’re not taking shareholder interests as a priority, then there is an argument to say there can be a benefit from Saba, or any other institutional investor, coming along and seeking to introduce measures that narrow that discount.

That is market efficiency. We need to be careful to balance those interests, because not every investment trust is perfect. You need that discipline and capital markets pressure.

To Katya’s point, if we get more demand and discounts narrow, the opportunity for institutional investors to come along diminishes because there won’t be that potential to realise the discount using corporate actions.

Hopefully, we were successful in achieving a good outcome on Herald, which was announced last week, where the vehicle gets to continue, shareholders get a redemption option or tender option, and the vehicle will continue while Saba exits. You can achieve a sensible outcome.

Kyle Caldwell: Another related question, Christian, is about investment trust discounts.

The person who wrote in said investment trust discounts prompted Saba to become interested in the UK investment trust industry. Are fund firms doing enough to get across the message that some investment trust discounts are a potential opportunity?

Christian Pittard: I think that’s absolutely right. That’s why we’re here.

As a personal investor, I look at discounts as an opportunity to gain exposure at an attractive value — with all the caveats Andrew has set out. You need to be careful.

But if Saba sees value in those discounts, that should pique people’s interest. They are doing it to make money for their investors.

Kyle Caldwell: Andrew, one for you. How can investors be aware of Saba’s actions, and what would you say to an investor who holds shares in an investment trust where Saba starts building a position? How should they approach that?

Andrew Lister: That is difficult because it is an aspect of investment trusts where an institutional investor has significantly better information than a retail investor.

By the time Saba has a big stake in a trust, it is probably going to be in the news. That is likely to be the main way people become aware of it.

I wouldn’t pay too much attention to which other investors are on the register. Sometimes that will have something to do with a discount and the direction of travel — either a large shareholder selling or an active shareholder buying aggressively — but it is not easy.

What I would say is that one of the benefits of being a retail investor, certainly versus an institutional investor, is that even in a small investment trust your liquidity is generally not constrained.

If you don’t like what you’re seeing, you can sell. If you do like what you’re seeing, there is no impediment to buying more.

That is one of the benefits of having a listed vehicle. You can buy and sell when you like. Read what you can, listen to board communications, read what the chair is saying, and make your decision based on the facts rather than what anyone else is doing.

Kyle Caldwell: The next question, which is not Saba-related, asks: what catalysts might trigger a return to the days when many investment trusts traded on a premium, enabling them to issue new shares and grow the sector again?

Katya Gorbatuk: There are other markets this industry can learn from.

In Canada, it is standard practice for pension funds to build proactive and ongoing relationships with specialist asset managers in their respective fields, for example infrastructure. There is a process of building relationships that is honed over time.

Similarly, here, pension funds recognise the need to invest across different asset classes. A situation where there is only 5% in equities and 1% in private markets is untenable, even from the perspective of generating sufficient returns for beneficiaries.

If there was a concerted effort to build relationships with specialist managers in areas of focus for pension funds, that would go a long way. It would be a positive signal and would start capital flowing into investment trusts. That would help discounts close and allow new issuance to take place at scale.

Andrew Lister: Another under-discussed factor is that a UK-listed investment trust is still a UK equity.

If you look at a UK equity income fund, it sits in the FTSE 250. If the FTSE is not in a happy place, which it hasn’t been for many years, institutional investors have been leaving the UK and investing more abroad. The UK has become a very small part of global equity indices.

If that starts to turn the corner, and the FTSE has been delivering quite good performance lately, helped by sectors that were out of fashion and are now more in fashion, then the general tide will flow back towards investment trusts. That is an important piece of the puzzle.

Christian Pittard: The evidence is that discounts have narrowed over the past couple of years.

Looking at our own stable, there was a period when we weren’t issuing new shares and trusts weren’t at a premium. They are again, and we are doing issuance. It’s not just the abrdn stable; others are too.

Discounts have narrowed and are generally improving. Institutions have seen value and are investing. It feels like we are seeing green shoots.

Andrew Lister: We are also seeing new issuance. In the last few weeks, very topically, we’ve seen some significant new issuance. We’re talking about the largest amount of capital raised for around five years.

In that five-year period, we’ve seen the opposite of issuance: buybacks, tender offers, capital return through mergers and liquidations, including some very high-profile examples. Smithson, for example, converted into an open-ended fund.

There has been an awful lot of supply taken out of the market — billions of pounds. I think last year it was around £10 billion, and the year before it was around £10 billion. It takes time for the market to respond, but the green shoots Christian described suggest we could get back to a situation where the industry grows again.

Kyle Caldwell: We’ve had a couple of questions related to younger investors and ETFs.

This one says: as a relatively new retail investor in my 30s, how do investment trusts justify higher charges for active management compared with passive ETFs, particularly when many passive ETFs are currently performing so well in this market cycle?

Andrew Lister: I’ll have a crack at that.

On fees, it’s a tough nut to crack. The way we think about it is that if you’re buying something at a discount to asset value, the share price probably reflects the fees. It effectively discounts the future fees.

If you’re buying the right thing at the right price and at an attractive discount, you are being nicely compensated for those fees.

I’m also not convinced it is true that all investment trusts are more expensive than open-ended equivalents. If you’re an income investor — and maybe you’re not focused on income in your 30s — but if you’re towards retirement and thinking about income and dividends, buying a yielding asset at a discount can often give you an uplift in yield that covers the cost.

There have also been a lot of fee negotiations between boards and managers. Trusts are becoming cheaper all the time. I can’t remember the last time I saw anyone putting up a fee on an investment trust.

Trusts are subject to the same commercial pressures on fees as the rest of asset management. Even if you’re paying an extra five, 10 or 15 basis points, you should be getting a lot in return.

These are more complicated vehicles to run, with a board, board accounts, marketing and other elements involved. If they are a little more expensive, you should be getting something extra. If you’re not, don’t own that trust.

Christian Pittard: The performance numbers we’re talking about are net of all operating expenses. That’s your total return as a shareholder, and that’s the gauge you should be using.

We’re not talking about pre-cost performance. It is post-everything — the return to you as an investor.

When I’m investing in an abrdn fund, I don’t get a different cost or charge to any other investor. There is one share class, and we are all investing in it. To me, it is all about performance net of costs and charges. That is the test, and that is where we should be judged.

Kyle Caldwell: The next question asks: if ETFs continue absorbing flows and compressing fees, do you foresee a gradual extinction of smaller actively managed investment trusts over the next decade, particularly those unable to maintain scale, liquidity and retail engagement?

Katya Gorbatuk: Not all investment trusts have to be huge. When it comes to financing scale-ups, it is hard to allocate out of a very large entity. It is important to have diversity of vehicles depending on what they do.

I don’t think investment trusts will become extinct. They serve distinct purposes. There is overlap and some competition, of course, and there is general competition for capital. But investment trusts can offer something completely unique: access to areas of investment and companies that will never form part of an index, including smaller quoted companies, less liquid companies and private assets.

The differentiation has to be based on the underlying proposition, not just costs and fees.

Some investment trusts have done a tremendous job of restating exactly what they do. In the recent C-share capital raise by Seraphim Space Investment Trust, retail investor participation was part of what made it successful. That is inextricably linked to market communication strategy and decoding the exciting things happening within that portfolio.

Christian Pittard: I think the question is well placed because we all recognise the pressures.

As wealth managers have consolidated, they need bigger, more liquid trusts. It is harder for them to hold smaller trusts. If something is more retail-orientated, perhaps you don’t need that same scale.

In general, though, the structure works very well with more scale. There are lower operating costs, greater true liquidity, tighter spreads, and more efficient communications, marketing and investor relations.

Scale has attractive features for most investment trusts. But does that mean every small trust disappears? I don’t think so.

Kyle Caldwell: Of course, some investment trusts with a smaller amount of assets could be potential hidden gems. One thing retail investors should keep a close eye on is the bid-offer spread, because occasionally they can be wider than you might be comfortable with.

Andrew, do you have any further thoughts?

Andrew Lister: I think that’s the trend we’ve been seeing. Does the trend continue? Probably. But it’s a Darwinian process, and the sector has been here before.

There are whole subsectors of investment trusts that used to exist and no longer exist because there was no demand for them.

What’s interesting at the moment is that the timeline seems to have compressed. The amount of time given to a manager, vehicle, strategy or asset class before people decide to knock it on the head has shortened.

The sector would benefit from being more dynamic in reinventing itself. If something hasn’t worked, you nip it in the bud, wind it up, give people their money back and move on to the next thing.

There will be more consolidation and more corporate action. But some smaller trusts are absolutely hidden gems. They wouldn’t work at massive scale. I can think of many we are invested in where we would hate to lose them because they have been great, we expect them to continue to be great, and we wouldn’t want them to be any bigger.

Kyle Caldwell: We’ve had a couple of questions related to investment trusts being known as the City’s best-kept secret. We’ve talked about the differences between funds and investment trusts, so I’d like to end by asking each of you for your number one selling point for investment trusts.

What stands out in the structure the most?

Katya Gorbatuk: I think it is the ability to provide long-term capital that is not subject to redemption pressure.

That long-term horizon enables investment trusts to invest in the most exciting areas where capital is needed. The amount of capital needed to fulfil our strategic priorities — whether that is energy independence or supporting scale-ups so we don’t lose them to overseas jurisdictions — can be deployed very efficiently through the investment trust structure.

Andrew Lister: I’m going to cheat slightly.

Some of the best-performing investments you can have are when you do the homework we’ve been discussing and identify a good trust trading at an attractive discount. If the discount narrows, the NAV rises and the asset class performs, you have a really powerful combination of factors.

That can give you a much better return than something passive or an ETF. It is difficult to find that in many places. It is worth doing the work, because when you get it right, you can get it really right.

Christian Pittard: I agree with Katya and Andrew, but would add that we haven’t really touched on income characteristics and the reliability of that income.

There is some really good data relating to the AIC’s dividend hero status and next-generation dividend heroes. There are 50 funds that have increased their dividend consecutively for 10 or more than 20 years in some cases. That is remarkable.

The response to COVID was also stark. Investment trusts were much better able to maintain or increase dividends in 2020 compared with 2019, compared with many open-ended and ETF funds that do not have the benefit of the 15% revenue reserve buffer.

If you want reliable income, investment trusts are a great place to look. There is a powerful track record. Some funds have maintained dividends for decades, and they are not going to give that up lightly.

Kyle Caldwell: That is due to the structure and the fact they have the ability to retain up to 15% of income generated each year and put it into a revenue reserve.

Open-ended funds, by contrast, are compelled to return whatever income is generated to investors in a given year. They can’t hold anything back. That is why so many investment trusts have outstanding dividend track records.

I do think that is a key feature that helps investment trusts stand apart.

Thank you to my panellists today. Thank you for joining me.

Christian Pittard: Thank you very much.

Kyle Caldwell: And thank you for tuning in.

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