5th August 2025
People who know me best wouldn’t immediately think of me as a ‘glass half full’ kind of person. In fact, I’ve been called Victor Meldrew plenty of times because I do like a moan! However, we’ve noticed some unfair negativity towards investment trusts after a few recent news events and we think the sector deserves a more positive perspective.
First, the core infrastructure trusts. As Dan’s Crescendo from a couple of weeks ago explained, we were positive on the INPP investment in Sizewell C as it demonstrated that listed investment trusts still have an important role to play in the UK government’s infrastructure plans. Furthermore, the deal was well-structured, giving shareholders an attractive risk reward profile and, crucially, the investment didn’t preclude further accretive share buybacks while the shares trade on a discount. However, there were some commentators who focussed more on INPP’s cashflows over the next 5 years and whether the management and board would be able to execute on the disposals of the non-core assets to finance this. Our view is that the management team and board have an excellent track record and should be given the benefit of the doubt that they can execute on the strategy, and we should be encouraging more participants to buy the shares on that basis. If the shares continue to trade on a discount, then we risk INPP attracting the interests of an overseas or private investor taking it away from us, having already lost BBGI to a Canadian pension fund earlier this year.
Second, the renewable infrastructure trusts. Record low wind speeds across the UK and Europe have caused NAVs and dividend cover to be hit. It is not ideal that the success or failure of an investment is determined by the weather, so for us, as with any investment, we accept that we don’t know the future, so there has to be a sufficient margin of safety based on the current facts. Both the Greencoat trusts have disclosed that even with record low wind generation this year, the dividends were covered by those lower cashflows, and crucially that is whether the debt is amortised or not. Dividend yields are high, have historically grown in line with inflation and the boards have committed to that continuing. Meanwhile, the NAVs should benefit from lower interest rates and the boards have strong capital allocation policies. Investors can mitigate the risk of a dividend cut by owning the wind trusts alongside other renewables that have a mix of energy sources; indeed the solar funds will be enjoying the UK’s glorious spring and summer this year. So even with lower wind speeds, we believe the total returns from a well-constructed basket of alternative asset trusts will outperform cash on a sensible time horizon albeit with a bit more volatility. After all, this is why they have been brought to the UK market and why investors should embrace them.
Third, Chrysalis reported a stellar NAV update for Q2 2025 of +13.7% driven mostly by a material upward revaluation of its largest holding Starling Bank. Already at over 30% of NAV, it was revised up by 42% reflecting its progress in the UK banking sector but also the inclusion of Engine, Starling’s own banking software platform, for the first time. The second biggest holding Klarna was also written up as was the third largest, Wefox. These three uplifts more than offset the modest write downs elsewhere in the portfolio. The resultant portfolio is now heavily concentrated such that the top four companies (add Smart Pension to the other three) represent 81% of assets. This level of concentration has prompted concern among some within the sector and might explain why the share price was only up 8% on the day, causing the discount to widen 5% to 30%. To our mind, this performance validates the investments in the portfolio and the closed-ended structure allows winners to be left to run without the manager compelled to reduce (not that it is easy to top slice private companies obviously!). Don’t investors want underlying investments to go up in value so they become larger positions? In addition, Starling (42.3% of NAV) and Klarna (15.1%) are widely regarded as fantastic private companies (are they still called unicorns?) destined for greatness so if UK investors want access to them, the only route is indirectly via Chrysalis. Indeed, it has been argued that 3i Group is trading on a whopping 52% premium to its NAV because it is the only way UK investors can get access to Action, the fast-growing private European supermarket chain that represents around two-thirds of 3i’s assets. We don’t hear anyone complaining about 3i being too concentrated. Finally, the capital allocation policy is good with a commitment to return cash from realisations to shareholders and backstops in the diary in 2026 and 2027 to ensure shareholders are on board with the strategy. Take all this into account and a 30% discount is too cheap and should warrant positive commentary rather than only highlighting minor reasons to be concerned.
We believe we are in a golden period for investors in the investment trust sector. Accepting this is a sweeping statement but: discounts are wide, underlying valuations are attractive, yields in the infrastructure and renewables sectors are well in excess of government and corporate bonds, corporate governance is vastly improved from a few years ago (still some room for improvement in places), a good chance that the cost disclosure situation is resolved this year and M&A is shrinking the supply of shares. The missing ingredient is a new source of demand. Everyone already involved in the sector will benefit from sounding more positive and that should encourage more investment flows to ensure the sector lives on for another 150 years. Of course, we all have the right to be bearish for genuine reasons, express caution or to call out bad behaviours, but we see no value in being ‘glass half empty’ especially when the arguments are nuanced and there are positives to highlight too. We suspect the pessimism may even stem from recency bias: a narrowing of discounts from very wide levels that may have come to be regarded as the new norm by some. We believe in a future for the sector that involves a mixture of trusts trading at discounts and premiums. How else will the sector grow and the IPO market return unless we imagine a world in which premiums are no longer regarded as exceptions?
Daniel Lockyer – Senior Fund Manager
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. FPC25481
