Investment Trust Discounts and Premiums 2026: What They Mean for Investors

Investment trusts have a structural quirk that sets them apart from every other mainstream investment vehicle: because they are listed companies with a fixed number of shares, supply and demand in the market can push their share price above or below the value of their underlying assets. Understanding discounts and premiums -- and how they arise, narrow, and widen -- is essential for any UK investor considering adding investment trusts to their portfolio.

Net Asset Value vs share price: why they differ

The Net Asset Value (NAV) of an investment trust is the total value of its portfolio divided by the number of shares in issue. If the trust owns assets worth £100 million and has 100 million shares, the NAV per share is £1.00.

But because an investment trust is a listed company, its shares trade on the stock exchange like any other company's shares -- based on supply and demand, sentiment, and investors' views on the trust's prospects, not just the underlying asset value. So the share price may be £0.90 (a 10% discount) or £1.10 (a 10% premium).

This closed-ended structure is what distinguishes investment trusts from open-ended funds (unit trusts and OEICs), where investors buy and sell units directly from the fund at NAV -- no premium or discount can develop.

Why does this matter for investors?

Buying at a discount creates a potential double opportunity: the underlying investments grow and the discount narrows. Buying at a premium does the reverse -- even if investments perform well, a narrowing premium can erode returns.

What drives discounts: the common causes

Investment trusts do not trade at a random discount. The discount (or premium) reflects specific factors:

1. Asset class sentiment. In 2022-23, UK infrastructure trusts and renewable energy trusts saw their discounts blow out from small premiums to 20%-30% discounts as rising interest rates made their fixed-income-like dividends less attractive by comparison.

2. Illiquid underlying assets. Trusts investing in private equity, direct property, or unlisted companies can trade at persistent discounts because investors cannot verify the NAV independently. The discount is partly a "liquidity premium" for holding illiquid assets in a liquid wrapper.

3. Manager track record. A trust that has consistently underperformed its benchmark will usually trade at a wider discount than a top-quartile performer in the same sector.

4. Size and trading volume. Smaller trusts with thin daily trading volumes often trade at wider discounts simply because institutional investors cannot buy or sell large positions without moving the price.

5. Fixed life / wind-up uncertainty. Some trusts have a fixed life or regular continuation votes. Uncertainty about whether the trust will continue can widen discounts as investors price in the risk of a wind-up at an unknown NAV.

Discount control mechanisms: how boards manage it

Many investment trust boards have discount control mechanisms -- policies to limit the discount and protect shareholders:

Share buybacks. The trust uses cash from its reserves to buy back its own shares in the market. This reduces the number of shares in circulation and supports the share price, narrowing the discount. Buybacks are the most common tool.

Tender offers. Periodically the trust offers to buy back shares directly from shareholders at or near NAV. This gives shareholders an exit at close to fair value and signals board commitment to fair pricing.

Issuance at a premium. When a trust is in demand and trading at a premium, the board can issue new shares at close to the premium price, raising capital for the trust and diluting the premium.

Continuation votes. Some trusts hold regular votes on whether the trust should continue. If shareholders can vote it into liquidation at NAV, the discount cannot persist too far below NAV (or arbitrageurs would buy the trust and vote for wind-up).

Gearing: amplifying returns and risks

Unlike open-ended funds, investment trusts can borrow money to invest more than their net assets -- this is called gearing. A trust with net assets of £100 million but £120 million invested (borrowing £20 million) is 20% geared.

The upside of gearing. If the portfolio grows 10%, a 20% geared trust's assets rise to approximately £132 million. After repaying the £20 million borrowing, net assets are £112 million -- a 12% return for shareholders, better than the 10% portfolio return.

The downside of gearing. If the portfolio falls 10%, assets drop to £108 million. After the £20 million loan, net assets are £88 million -- a 12% loss for shareholders, worse than the 10% portfolio fall.

Gearing levels vary from zero (some trusts operate ungeared) to 30%+ for some income-focused trusts. The optimal gearing level depends on the trust's strategy, interest rate environment, and expected returns. At 2026's interest rates, fixed-rate borrowing secured years ago at 2%-3% may still be accretive; variable-rate borrowing at 5%+ needs careful justification.

Dividends from reserves: the income smoothing advantage

One of the most practical advantages of the investment trust structure is the ability to retain income in good years and pay it out in lean years. Open-ended funds must distribute substantially all income received; investment trusts can hold up to 15% of annual income in reserve.

This means many investment trusts have built up substantial "revenue reserves" over decades -- allowing them to maintain or even grow dividends through years when portfolio income falls.

The Association of Investment Companies maintains a "dividend heroes" list of investment trusts that have raised their dividends every year for 20+ consecutive years, including several that have done so for 50+ years. This kind of dividend consistency is impossible in an open-ended fund.

Holding investment trusts in a Stocks and Shares ISA

Investment trusts are fully eligible for inclusion in a Stocks and Shares ISA. The annual ISA allowance is £20,000 in 2026/27, and all dividends and capital gains within the ISA are completely sheltered from UK tax.

This makes the ISA wrapper especially valuable for:

• Income investors using investment trust dividends as tax-free income
• Long-term growth investors compounding trust returns without CGT
• Higher-rate taxpayers who would otherwise pay 33.75% dividend tax on income above the £500 allowance

If you are comparing investment trust performance, always consider the after-tax return -- an investment trust paying 4% inside an ISA is more valuable than the same trust outside an ISA for a higher-rate taxpayer.

Sources

• Association of Investment Companies (AIC): Understanding investment trusts
• FCA: Closed-ended collective investment scheme guidance
• HMRC: Individual Savings Accounts (ISAs)
• gov.uk: Stocks and Shares ISA allowances 2026/27