Are investment trusts still cheap? This is where the best opportunities are now, says the INVESTING ANALYST
Investment trust discounts have narrowed over the past year but are there still bargain opportunities on offer?
Josef Licsauer, investment trust research analyst at Kepler Partners, explores whether trusts can still be classed as cheap.
Anyone hoping for a smooth ride in markets during 2025 was quickly disappointed. Investors faced political shocks, sudden market swings and fresh questions about where future growth might come from.
Yet behind the volatility, something important began to change. Inflation began to fall, central banks started cutting interest rates and investors slowly broadened their focus beyond US mega-cap stocks.
Against this backdrop, investment trusts – which have been out of favour in recent years – began quietly rewarding shareholders again. For investors willing to look more closely, especially at trusts trading on discounts, the landscape still offers opportunities.
Discounts widened sharply across the sector over recent years, reaching about 19.3 per cent at their widest in late 2023
Investment trusts and discounts
One of the most important, and often misunderstood, features of investment trusts is the idea of a 'discount'.
Unlike most funds, investment trusts trade on the stock market, which means their share price is set by supply and demand.
The underlying portfolio has a measurable value, known as net asset value, or NAV, but the market price of the shares can be lower or higher than this figure.
When the share price is below the value of the underlying investments, the trust is said to trade on a discount. In simple terms, investors are buying £1 worth of assets for less than £1. For example, if a trust's assets are worth £100 but its shares trade at £90, the discount is 10 per cent.
This matters because returns can come not only from the investments themselves going up, but also from the discount narrowing. If sentiment improves and that 10 per cent discount shrinks, the share price can rise even if the underlying portfolio stays roughly the same.
Discounts widened sharply across the sector over recent years, reaching about 19.3 per cent at their widest in late 2023 as higher interest rates and poor sentiment drove investors away.
Since then, however, this trend has begun to reverse. Average discounts tightened to around 11.4 per cent, with equity-focused trusts narrowing from roughly 14.5 per cent to 8.2 per cent. That change alone provided a meaningful boost to shareholder returns.
Investment trust sector discount movements
Several forces helped drive this improvement. Falling inflation and lower interest rates made investment trust yields more attractive again. Confidence also improved as markets beyond the US started to perform better. Crucially, trust boards became far more proactive.
More than £9billion of share buybacks took place during 2025, alongside mergers, fee cuts and, in some cases, manager changes. Pressure from activist investors such as Saba Capital may have been controversial, but it pushed boards to act more decisively, helping close discounts and improve shareholder outcomes.
For existing investors, narrowing discounts provided a welcome lift. For new investors, the story may be even more interesting. Despite strong returns, some trusts offering access to attractive regions continue to trade on wide discounts, in several cases still below their long-term averages.
Even where discounts have narrowed sharply, many remain on absolute discounts, allowing investors to access underlying assets below NAV. If sentiment continues to improve, further narrowing could provide an additional tailwind to returns.
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Josef Licsauer, investment trust research analyst at Kepler Partners
Investors look beyond US mega-cap shares
Another major theme of 2025 was the broadening of market leadership – and this looks set to continue for 2026.
For years, returns had been heavily concentrated in a small number of US technology companies.
Last year, investors started rediscovering opportunities across different regions and sectors.
Mining and precious metals performed strongly as gold and silver benefitted from geopolitical uncertainty and a weaker US dollar. Mining shares, which had lagged the metals themselves in previous years, finally caught up.
This supported mining trusts like BlackRock World Mining whose performance was buoyed by rising commodity prices, improving cash generation and the managers' ability to adjust exposures more nimbly than the major miners.
BlackRock World Mining returned around 74 per cent in both NAV and share price terms over 2025, with gains reflecting not just gold's rally but also stronger copper demand linked to electrification, data centres and the energy transition.
BlackRock World Mining's discount can be volatile, and has ranged from between as narrow as 0.5 per cent to 8 per cent so far in 2026 amid fluctuations in gold and silver prices, creating ongoing attractive entry points for investors.
Emerging markets were another standout. A weaker US dollar, improving fundamentals and relatively cheap valuations drew investors back.
China led the early gains, helped by government stimulus and renewed interest in technology developments such as DeepSeek, but opportunities extended across many emerging economies.
Fidelity Emerging Markets Limited delivered a NAV and share price return of almost 60 per cent and just over 70 per cent, significantly outperforming the broader index over the past year, and resulting in its discount narrowing from double digits to around 7.5 per cent, at time of writing.
Despite this, we think Fidelity Emerging Markets Limited still offers investors access to the long-term potential of emerging markets through a differentiated, actively managed vehicle, with potential to benefit from further re-rating.
Closer to home, both the UK and Europe surprised investors by outperforming the S&P 500 despite ongoing scepticism.
In the UK, negative sentiment had kept valuations low even as dividend yields remained attractive.
Trusts exposed to this backdrop, including Temple Bar, benefitted from a renewed focus on value investing and improving corporate activity, evidenced in a 32 per cent NAV return and near 45 per cent share price return over the year, pushing it onto a premium.
However, there are other UK equity income trusts, such as JPMorgan Claverhouse, that continue to offer exposure to similar structural opportunities whilst trading on a discount, potentially providing room for further re-rating alongside attractive yields.
European markets also enjoyed a stronger year, supported by fiscal spending, improving credit conditions and a recovery in domestically focused sectors.
Trusts including JPMorgan European Growth & Income were clear beneficiaries, posting NAV and share price returns of 33 per cent and almost 50 per cent respectively. This strong performance saw the discount narrow from around 10 per cent to trade close to par by year-end.
Meanwhile, other Europe-focused investment trusts continue to trade on a discount – including Baillie Gifford European Growth and Fidelity Europe Trust, which have posted strong one-year returns – offering investors access to the region's growth potential at an attractive valuation.
What should investors look for now
For 2026, the environment appears cautiously supportive. Lower inflation and falling interest rates should help markets overall, particularly where valuations remain reasonable.
Europe and the UK continue to look attractive relative to the US on valuation grounds, whilst emerging markets could benefit if global growth holds up and financial conditions remain favourable.
US smaller companies may also start to regain interest after years of underperformance.
Lower borrowing costs and improving earnings expectations could support a gradual recovery, particularly for higher-quality businesses.
Trusts with a quality bias, including JPMorgan US Smaller Companies (JUSC) – which sits on a discount of around 8 per cent – could be set to benefit if leadership broadens beyond the narrow group of speculative, AI-linked names that have dominated recent returns.
Risks remain, of course. US valuations still look stretched in places, geopolitical uncertainty is unlikely to disappear and markets may remain volatile.
But for investment trust investors, volatility is not always a bad thing. Discounts tend to widen when sentiment is weak and narrow when confidence returns, which means periods of uncertainty can create opportunities for those willing to take a longer-term view.
After several difficult years, the investment trust sector now looks leaner, more active and more focused on shareholder value.
Discounts have already narrowed from extreme levels, but many trusts still trade on wide, absolute levels. For investors, understanding how discounts work – and recognising where sentiment may still be lagging reality – could prove key to finding value in the year ahead.
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