Discounts, dividends and defence – how investment trusts are quietly keeping their edge

Written by David Johnson, CFA , Investment Company Analyst

In a year already overloaded with geopolitical shocks and economic recalibrations, it would be easy to miss the quieter – but no less meaningful – developments taking place within the UK’s investment trust market. While headlines may have fixated on activist campaigns and takeover bids, a number of trusts have quietly outperformed or innovated in ways that reaffirm the long-term value of the structure itself.

Won’t find it anywhere else

For retail investors seeking access to strategies beyond the reach of open-ended funds – or indeed, to asset classes not found elsewhere on the public market – investment trusts remain unmatched. Few examples illustrate this better than Seraphim Space Investment Trust (SSIT).

As the only pure-play space technology fund accessible to UK investors, SSIT finds itself well positioned amid rising global defence budgets and increased state interest in orbital infrastructure. The trust’s portfolio includes companies receiving high-profile defence and aerospace contracts – news that has helped compress its discount by 20 percentage points over the course of June. But given its still-wide discount of 26%, the fact that its NAV arguably is yet to fully reflect the growing demand for space technology, and the lack of competing listed strategies, SSIT’s may well have further to go.

The new dividend ‘heroes’

Trusts have long proven to be an excellent way for investors to satisfy their income needs. While the use of revenue reserves to smooth dividends is a useful feature, their ability to pay dividends from capital is what can set investment trusts apart from their open-ended peers. This year has seen a handful of trusts take the decision to draw on their capital accounts to enhance their dividends – placing them among the highest-yielding strategies (open- or closed-ended), with POLAR CAPITAL GLOBAL FINANCIALS TRUST PLC (PCFT), MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC (MTU), and J.P. Morgan Asia Growth and Income (JAGI) being three examples.

PCFT has recently announced an enhanced dividend policy, whereby it will pay a dividend equal to 4% of its NAV each year, starting from 1 December 2025. A c.4% yield is almost double its current yield of 2.2% (based on its previous dividend policy) and will make PCFT the highest-yielding global financial strategy within both the AIC and Investment Association peer groups (the latter being a peer group of open-ended funds marketed in the UK).

MTU has recently increased its dividend to 6% of NAV, up from 4% previously. A c.6% yield makes MTU one of the highest-yielding UK small-cap strategies across both open- and closed-ended funds (beaten by only two other investment trusts). This characteristic is made even more attractive by its continued focus on high-growth UK small caps – an investment style seldom associated with a 6% yield – making it a unique source of income.

JAGI now pays a dividend equal to 6% of its NAV, having adopted a new policy in its current financial year. This places it among the top three highest-yielding Asia Pacific strategies – a cross both open- and closed-ended funds – and, like MTU, JAGI is differentiated by its portfolio of high-quality companies, offering a yield that is rarely associated with these sorts of growth portfolios.

Double discounts

For a number of sectors, the discount widening they have experienced means that what once appeared to be good value, looks even better now. The team behind AVI Global Trust (AGT), a strategy that capitalises on discount opportunities (and arguably one of the best ways to capture their potential), has commented that the current ‘double discount’ of AGT – the combination of the trust’s discount and that of its underlying holdings – has become the widest they have seen since COVID-19.

While AGT offers a managed portfolio of discounted opportunities, 2025 has seen the trust space offer investors their own way to capitalise on the ‘double discount’ opportunity – with UK small caps arguably being the most fertile hunting ground. For example, this year has seen the gap between the forward P/E ratio of the MSCI UK Small Cap Index and the MSCI ACWI reach its widest level since COVID.

This makes trusts like MTU, BLACKROCK THROGMORTON TRUST PLC (THRG), and RIGHTS AND ISSUES INVESTMENT TRUST PUBLIC LIMITED COMPANY (RIII) excellent valuation opportunities. In the case of THRG, while its 11% discount is attractive, the fact that it has historically been one of the few UK small-cap trusts to trade at a premium over the last five years means there may be potential for a significant revitalisation in investor demand. RIII, meanwhile, combines one of the peer group’s largest negative Z-scores (currently -0.8) with one of the widest discounts, at 13%, making it one of the better examples of the UK’s increasingly attractive valuation opportunity.

Private equity

Private equity trusts have been out of favour recently, with some exhibiting particularly wide discounts, as investors have worried about the knock-on effects of higher interest rates. The logic was straightforward: it is not uncommon for private equity assets to have some debt in their capital structures – particularly more mature businesses – and this debt would be more costly to service, and higher discount rates would depress the valuations of long-dated, illiquid private assets. But as 2025 has progressed, it’s become increasingly clear that this thesis was, at best, overstated.

A good illustration of this is Patria Private Equity Trust PLC (PPET), which uses a diversified portfolio of externally managed private equity funds and direct investments. Having just released its half-year results, PPET has reported another period of improving valuations, with its average multiple increasing and realisations being made at an average 19% uplift to their carrying value. Not only have its values held up – they’re improving.

Another example is Oakley Capital Investments (OCI), which is focused on high-growth European mid-market private companies in one of four key sectors – technology, digital consumer, education, and business services. Thanks to its conservative approach to valuations, it has (in its recent annual report and Q1 update) shown little evidence of distress, despite recent market turmoil, reporting either unrealised NAV uplifts or realisations in line with carrying values.

Both these trusts are also making efforts in addressing their own discounts. PPET has already repurchased £15m worth of shares since the start of 2024 (as of 31 March 2025), with more likely to follow. OCI has committed to a share buyback programme of at least £20m per annum.

NB: this article has been prepared by Marten & Co and is for information purposes only. It is not intended to encourage the reader to deal in the security or securities mentioned within it. QuotedData is a trading name of Marten & Co Limited which is authorised and regulated by the Financial Conduct Authority. Marten & Co is not permitted to provide investment advice to individual investors.

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