4th September 2026
In the summer of 2023, when the investment companies sector was trading at its widest discount since 1990 (excluding the depths of the Great Financial Crisis in 2008 # ), we wrote a series of Crescendos titled ‘We Need to Talk About Investment Trusts’ (link here). Across the series we explained why we thought the average discount was so wide, why it mattered and what everyone involved in the sector could do about it. One of the main reasons we felt discounts were wide was the oversupply of shares of companies. There were too many sub-scale vehicles, too many lacking relevancy (such as conventional investment companies failing to maximise the benefits of the closed-ended structure) and a lack of desire from boards and managers to address their own discounts through proactive measures and optimal capital allocation (including more aggressive share buyback programme or corporate activity).
We recognised that there was also diminished demand caused by more attractive yields available from vanilla fixed income after the repricing of bond yields, wealth management consolidation causing some indigestion and the illusion of investment companies looking expensive to own due to the penal and erroneous PRIIPS and MIFID disclosure rules at the time.
Three years on from that Crescendo series there has been significant progress in reducing the supply of shares that we believe has been a major contributing factor to discount narrowing and decent shareholder returns over the period. Apologies for the following stats overload but it is necessary to prove the point.
According to Deutsche Numis’ research (thanks Ash Nandi), since the beginning of 2023 to end of June 2026, £47.7bn of capital has exited the sector (DN’s Investment Companies universe ^) through a combination of share buybacks (£25.4bn), tenders/redemptions (£5.8bn) and liquidations/realisations (£16.4bn). For share buybacks alone, 2023, 2024 and 2025 calendar years rank 3rd, 2nd and 1st respectively for the highest annual amount of buybacks since 1999. Even the first half of this year is ranked 4th over that period. Given the paucity of issuance, unsurprisingly net flows have been negative for 4 successive calendar years, totalling £43bn. The last time there were successive years of net outflows was in 2008 and 2009 when just £900m left the sector, which was more than replaced in 2010 when £2.2bn came back in, mostly through new issuance. Finally, since December 2023, the number of constituents in the investment companies sector has reduced from 311 to 243 through a combination of mergers, takeovers and delistings.
This has culminated in the market cap of the Deutsche Numis Universe falling from £207bn in 2023 to just £177bn now. This represents a 15% reduction which is impressive considering the UK Closed End Investment Index is up over 30% over the period (Source: FE analytics 31/12/2023 to 30/06/2026).
The results of this massive contraction in supply are clear to see. The average discount of the sector is now around 11%, a significant narrowing from the c.19% reached in 2023. Conventional equity investment companies have narrowed from 14% in mid 2023 to just under 10% while the discounts on alternative companies (infrastructure, property, private equity and debt) have narrowed from 30% to 19%.
We accept it is impossible to disaggregate the exact cause of the narrowing, but we are confident that the material shrinking in the supply of shares has been a massive factor. This is because we have yet to see the factors that reduced demand reverse. Bond yields have risen further over the last 3 years meaning the yield gap of investment companies versus the risk free rate has actually narrowed. Revised cost disclosure rules have anecdotally stopped selling pressure and demand is only beginning to pick back up. Pension funds are just starting to consider investment in the sector again – thanks to correct cost disclosure and confirmation that investment companies holding illiquid assets will contribute towards Mansion House Accord agreed minimums.
The big exception to the above comments about a lack of institutional demand is the undoubted role that Saba Capital has played in creating a new source of demand, albeit short term, that few could have foreseen 3 years ago (whilst also acting as a catalyst for the shrinkage in supply as they have forced tenders, wind-ups and mergers across a number of companies). Without Saba’s involvement, who knows whether there would have been as much consolidation as there has been or where the average discount would be?
Despite the significant supply side contraction, average discounts narrowing and the recent positive contribution to performance, we believe we are only in the early stages of the rejuvenation of the sector. We expect further reduction of supply due to the ongoing commitment to share buyback programmes by many boards as accretive uses of capital, and the potential for more corporate activity. But in addition, we feel confident that an improvement in the demand side of the equation is within sight. A huge amount of work and effort has gone into resolving the cost disclosure rules such that professional investors can once again own investment companies without them erroneously contributing to their aggregated OCFs or total cost disclosures. Just as exciting though is the potential renewed interest of pension funds opening the door to significant amounts of capital flowing into the sector.
Finally, retail investors seem to have an unsatiated appetite for the attractive yields on offer across the sector. In fact they have been the main constituent of investors that have bought as wealth managers and multi asset funds and others have sold. Research from Winterflood showed that the most bought investment companies across the retail platforms were those with high dividend yields. While alternative companies like Greencoat UK Wind and The Renewable Infrastructure Group are obvious beneficiaries (both have seen their retail ownership double over the last couple of years) with their well-covered dividends and double-digit yields, conventional equity companies also feature. Being able to pay income out of capital and hold some revenue earned during the good times in reserve to help smooth or grow the dividend in future fallow years make investment companies more attractive for income seekers than their open-ended equivalents.
We often remind our own investors of the power of discount narrowing as an idiosyncratic driver of returns. Using the alternative investment companies sub-sector as an example, the average discount narrowing from 30% to 20% over the past 3 years equates to a 14% return. If they can grow NAV alongside this discount narrowing, then total returns can be excellent. With a significant allocation in our Hawksmoor funds, it is very nice to see investment companies in the positive column of our performance contribution analysis.
We find ourselves unashamedly bullish on the prospects for shareholder returns in the investment companies sector. That is not to say we are complacent and we remain heavily engaged with several boards and are dissatisfied with several holdings. However, it is undeniable that headwinds are turning into tailwinds. Capital allocation discipline and governance is improving – voluntarily or involuntarily. New investors are interested. Regulations are changing for the better. We believe a new dawn for the sector is upon us.
Hawksmoor Fund Managers
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For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC26754.
