The Investment Double Whammy: Opportunities in London’s Investment Trust Sector

There is unprecedented excitement in the London-listed investment trust sector, driven by structural advantages, attractive valuations, and a wave of corporate activity. These Investment trusts, also known as investment companies, are public companies listed on the London Stock Exchange. 

A quiet but powerful shift is underway—one that South African investors should not overlook. These listed funds, known for their shareholder-friendly structures and access to alternative assets, are experiencing a rare convergence of value and momentum. As discounts to net asset value (NAV) narrow and corporate activity intensifies, investors are seeing returns that exceed the performance of the underlying portfolios. It is a compelling setup: rising asset values paired with shrinking discounts, creating a “double opportunity” for those who position themselves early.

There are over 300 investment companies in existence, with a combined market capitalisation of approximately £280 billion. They make up a third of the FTSE 250 by number of companies, and there are five constituents of the FTSE 100 index.

Why Discounts Matter

As discounts narrow, the share prices rise by more than the value of the underlying investments, creating a double whammy effect. Not only do investors gain from appreciation in the portfolio’s assets, but the closing gap to net asset value (NAV) also amplifies share price gains beyond the NAV growth. For instance, if a trust’s NAV rises by 5% while its discount shrinks from 15% to 10%, the share price could surge by around 11%, creating outstanding returns. 

Historically, discounts have widened during periods of market stress, but the current cycle has been unusually prolonged. The sector’s average discount peaked at 19% in October 2023, the widest since the 2008-09 Global Financial Crisis, amid rising interest rates and economic uncertainty. Since then, the average discount has steadily narrowed to its current level of 13.5%, as the bargains on offer have attracted numerous investment institutions, activist investors, and hedge funds, seizing the opportunity of acquiring high-quality assets at a fraction of their intrinsic value. 

US-based hedge fund Saba Capital is the latest activist investor to shake up the investment trust sector, building significant stakes in several companies and forcing shareholder votes in at least seven with the aim of replacing the boards, merging the companies, and taking over the fund management. All seven votes went against Saba Capital, but its CEO Boaz Weinstein, is adamant that his assault is only just getting started. The onslaught by predatory investors has been a catalyst for a surge in corporate activity in the sector. 2024 marked a peak for mergers, acquisitions, share buybacks, tender offers, and managed wind-ups, with momentum carrying into 2025, which is on track to be the record year for corporate activity. 

Built for Shareholders

What makes investment companies particularly appealing is their shareholder-centric structure. The fund managers are mandated at the behest of the shareholders, which ultimately means they can be fired and replaced if performance is disappointing. There are numerous backstops for investors to ensure that wide discounts eventually narrow. Many investment companies offer periodic exit opportunities, which provide investors a chance to sell close to NAV; some offer periodic continuation votes, and strategic reviews, which can culminate in the company being acquired, merged, or wound up, normally at or close to NAV. All these forms of corporate activity invariably result in a re-rating of the shares. Share prices tend to close in towards NAV as the corporate event approaches. Corporate events and all other forms of “discount control mechanism” essentially provide investors with a “free put option,” a downside protection akin to an insurance policy on the shares. 

Access to Alternative Assets

Another historic advantage over other forms of investment fund is that they hold permanent pools of capital and are not under pressure from other investors to sell assets. This enables them to make long-term investments in illiquid securities such as unlisted shares, venture capital, infrastructure, specialised credit, or hedging strategies. These so-called alternative asset classes make up 34% of the investment company universe by market capitalisation. Alternatives not only offer potential for higher returns (often outperforming public equities over decades) but also provide diversification, reducing correlation with volatile stock markets. For everyday investors, investment companies democratize access to these sophisticated strategies, which might otherwise require multimillion-pound commitments. 

Why It Matters for South African Investors

At Overberg Asset Management, we have leveraged this sector’s strengths since 2001, constructing global private client share portfolios around investment companies. This approach remains unique in South Africa, granting clients exposure to top-tier fund managers (such as BlackRock, Baillie Gifford, or JPMorgan) and a mix of equities and alternative assets at discounts well below their fair value. With the global economy showing signs of resilience, bolstered by stabilising inflation, potential rate cuts, and rebounding growth in key markets, the outlook for further discount narrowing is bright. Emma Bird, head of investment trust research at Winterflood, echoes this optimism: “There is considerable scope for average discounts to narrow back to single figures... In a few years’ time, with the benefit of hindsight, I suspect some investors will be looking back at the returns they could have made and kicking themselves for not taking advantage.”

Risks persist, including geopolitical tensions, policy uncertainty, and the impact of trade tariffs. However, the average discount of the £280 billion investment company universe has narrowed steadily from 19% in October 2023, to 16% in December 2024, to its current level of 13.5%, and is likely to continue narrowing, as corporate activity intensifies and economic tailwinds strengthen, creating a rare double whammy for investors. Despite their recent narrowing, discounts are still wide by historical standards. Between 2012 and 2022, the average discount was consistently in the low single digits, suggesting we have considerably further to go in the current re-rating. To take advantage of this unique offshore investment opportunity as a South African investor, please contact us or visit www.overberg.biz for more information.

Disclaimer

Information and opinions presented in this Article were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Article (originally written in August 2025) and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts, or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this Article. Overberg Asset Management (Pty) Ltd. is an authorised services provider: 783.

Contributed by: Nick Downing

CEO, Director, Overberg Asset Management