What caught my eye this week.
There’s a mildly titanic battle going on in the beleaguered UK investment trust space.
Everything from the rise of index funds to the 2022 reset in interest rates to steady outflows from all UK equities – not to mention lousy performance in many cases – has left the sector littered with sub-scale funds trading on huge discounts to net assets.
Kicking the boot in were disclosure rules that made often high fees look ever higher. That prompted wealth managers to abandon the sector in fear of fiduciary regulation violations.
But it’s probably the unstoppable might of an S&P 500 tracker fund – or even just a global equities ETF – that has done the most damage.
Why own an old-fashioned investment vehicle with a board of directors and odd assets from all over the place when the simplest ETF has trampled your returns – and with less volatility for good measure?
No wonder even a bluest of the blue chips trust like RIT Capital Partners has traded for as much as 30%-off in recent times.
Or that I’ve been drawn like a moth to this bin fire for multiple Monevator Moguls articles – and with many more to come I’m sure.
My precious
Now if everything I just wrote made no sense to you then (a) congratulations, you’re hopefully a passive investor in cost-effective index funds and (b) you’re part of the problem, from the other perspective.
You see, investment trusts were the original collective vehicles, invented more than 100 years ago to enable everyday investors to get exposure to much wider pools of assets at a far lower cost.
They were the global trackers of their day. But the problem is that the global trackers of the day these days are, well, global trackers.
Even worse, attempts to recalibrate trusts towards more sophisticated investors by offering more exotic exposures have also come a-cropper.
In theory, investment trusts are the perfect vehicles to enable the ownership of more illiquid, unlisted, or esoteric assets, whether that be music royalties, wind farms, or warehouses for the logistics industry.
Investors don’t really need these in their portfolio, but a case can be made for all of them.
Yet they’re about as popular right now as a glass hammer in search of a nail. And as soon as their underlying assets face a problem – such as more competitive yields from government bonds – it seems investors dump these trusts. The discount widens and a potential death spiral begins.
So again, the dispassionate reading is these vehicles have outlived their usefulness. The market is telling us that.
As Brandon Lee said in The Crow: “They’re all dead. They just don’t know it yet.”
They have a cave troll
Well maybe, but I’m an investing romantic. Where you see a bunch of overpaid fund houses peddling unwanted products to a disinterested market that’s moved on, I hear J.R.R. Tolkein.
One phrase keeps coming to mind from The Lord of the Rings. The ‘last alliance of elves and men’ that united to defeat the dark Lord Sauron, who in Tolkein’s mythology represents brutish and ugly modernity.
And conveniently, in the last year or so we’ve been able to put a face on this fanciful clash. One Mr Boaz Weinstein of Saba Capital, an American hedge fund manager turned supervillain in the UK Investment Trust Cinematic Universe for his attempts to roll-up and extinguish seven of their number.
Weinstein is – conveniently for scriptwriters – a brash American, who dubbed his targets The Miserable Seven amongst much else. It’s fair to say both the press and the trust industry returned fire in kind.
Critics point out that Weinstein can see what many of us can see – that trusts trading at big discounts to their net assets are pregnant with value – only he wants to unlock it more for himself and his wider business aims.
Ironically, such discounted value has always been underwritten in investment trust lore by the potential of an activist to come along and liquidate a fund to release it, even if the possibility might often have seemed more theoretical than red in tooth and claw.
Yet now that Weinstein has set about doing it at scale, it’s a different story.
To quote another suitably-geriatric screen legend: “They don’t like it up them Mr Mainwaring.”
All that is gold does not glitter
I see and acknowledge everything above.
But as I said, unlike my purely passive co-blogger The Accumulator I’m an investing romantic.
And so I mentally punched the air this week when the first of these seven battles was resolved – with shareholders voting overwhelmingly to reject Saba’s takeover of the Herald Investment Trust.
A whopping 65% votes went against the hedge fund manager. Exclude Saba’s own 35% stake and just 0.15% of shareholders sided with the enemy at the gates.
A last alliance of fund managers and ordinary investors indeed. Hargreaves Lansdown – which, like other platforms, has publicised and facilitated the votes – said such engagement was ‘unprecedented’.
This, my friends, is the shareholder democracy that some say is being destroyed by passive investing. Active funds that (ideally) strive to allocate money towards the best prospects, and engaged shareholders who (you’d hope) care how and where their money is invested and managed.
Even the very wise cannot see all ends
Of course the Monevator house view is that most of us shouldn’t bother with any of this active malarkey.
That’s because index funds can more cheaply hitchhike on the price-discovery efforts of active managers – or parasitically exploit them, if you prefer – and active investing is a zero sum game.
The result is the average investing pound will do better in an index fund than in an active fund. Any big picture consequences are moot when it comes to growing your own wealth.
As for engaged shareholders, long-time readers may recall the research that claimed it was the investors who checked their portfolios the least who saw the biggest gains – with the actually-dead doing best of all.
This house view hasn’t changed. I’m having fun on Moguls with some like-minded souls, but as our motto says Moguls is not for everyone. Me and TA overwhelmingly believe that until proven otherwise, passive investing will be the best approach for the vast majority of individuals. There may eventually be issues if everyone invests passively, but game theory says until then do what’s best for you.
And so this resistance to the supposed barbarian at the gate of the trust realm may really be a last alliance. A generation of likely older fuddy-duddies getting uppity about someone coming for their trusts – before the sector is flattened anyway by the inevitable victory of ETFs and index trackers.
Why fight it? They’re all doomed.
Well, maybe. But I’m an investing romantic and I was rooting for Gandalf and the gang outside the gates of Mordor. There’s room for everyone, and I’d miss these trusts were they to disappear.
One battle down. Six to go!
Have a great weekend.
From Monevator
Our updated guide to help you find the best online broker – Monevator
FIRE-side chat: better late than never – Monevator
From the archive-ator: Another good reason to open an ISA – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
British firms cutting jobs at fastest rate since 2009 – Proactive Investors
UK borrowing unexpectedly jumps – BBC
Cracks showing in Britain’s reserve currency status – Reuters
Rachel Reeves backs looser limits on mortgage lending [Search result] – FT
Hedge funds kept $1.8 trillion as fees; half their gains – Bloomberg via Y.F.
New rights for UK renters could come into force this spring – Which
Shein backlash fails to deter shoppers – BBC
Santander considers UK exit amid frustrations with high street banking – CNBC
Back to the office helps City of London’s tallest tower to full capacity – City AM
GMO’s new return forecast includes estimates if real rates contract – GMO
Products and services
Gilts turmoil pushes up annuity rates to almost 7.5% – This Is Money
TSB bank switch offer: up to £160 + £30 & NOW TV – Be Clever With Your Cash
Get up to £1,500 cashback when you transfer your cash and/or investments through this link. Terms apply – Charles Stanley
Does your insurance cover damage caused by bad weather? – Which
How to buy leasehold and avoid ‘fleecehold’ [Search result] – FT
Spike in borrowers in their 30s taking on ultra-long mortgages – This Is Money
Open an account with low-cost platform InvestEngine via our link and get up to £100 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Barclays the latest lender to bump up mortgage rates – This Is Money
Our friends electric, and gas – Getting Minted
Homes for sale for doer-uppers, in pictures – Guardian
Comment and opinion
The stock market is both a voting and a weighing machine – Morningstar
Is there a problem with passive investing? – Of Dollars and Data
Active ETFs are an extremely clever wheeze – FT
Investing is hard – Behavioural Investment
Gen Z Americans leaving European cousins in the dust [Search result] – FT
The devolution of US public capital markets – Cullen Roche
Money grows up – Humble Dollar
Time to lock-in 5% bond yields? [US but relevant] – A.W.O.C.S.
Estimating the probability of dementia – Oblivious Investor
“FIRE first, then a house” – Strong Money
Are you resilient? – Can I Retire Yet
Jonathan Clements on indexing, investment writing, and death [Podcast] – M.I.B. via Apple
Naughty corner: Active antics
Investors lose their appetite for the obesity trade – FT
Three reasons to buy bonds [US but relevant] – Animal Spirits via Apple
VC-backed unicorns still waiting for the exit lane to open – Institutional Investor
Forecasting returns for 2025 for the UK stock market – UK Dividend Stocks
14% a year? The cost of being entertained by thematic funds – Morningstar
Trump and the return to an inflationary era – The Bonddad
The state of the video games industry in 2025 [Slides] – Matthew Ball
Rather rich mini-special
More than 10,000 millionaires have left UK, says one analyst – Standard
Britain to soften non-dom tax rule changes following exodus – CNBC
Wealth of world’s billionaires grew by $2tn in 2024, report finds – Guardian
The persistence of elite wealth in American history [Research] – NBER
Reeves is alienating wealthy entrepreneurs who bring jobs – Independent
Kindle book bargains
Saving Time by Jenny Odell – £0.99 on Kindle
The Black Swan by Nassim Taleb – £0.99 on Kindle
Good With Money by Emma Edwards – £0.99 on Kindle
Number Go Up: Inside Crypto… by Zeke Faux – £0.99 on Kindle
Environmental factors
The impact of renewable energy on electricity costs – Klement on Investing
Great Barrier Reef hit by most widespread bleaching event ever – Guardian
Trump halts $300bn in US green infrastructure spending [Search result] – FT
Toads on the roads – Biographic
Crypto o’ crypto mini-special
The madcap rise of memecoin factory pump.fun – Wired
Your memecoin is your slush fund – Noahpinion
Trumpcoin and TikTok – Kyla Scanlon
Robot overlord roundup
Try China’s DeepSeek, which may be smarter than OpenAI’s AI – Mashable
Tips on using AI in your own work – Darius Foroux
Announcing the Stargate Project – OpenAI [and bashing it]
How we can use AI to create a better society – FT
Anthropic CEO sees a ‘country of geniuses in a data centre’ – Business Insider
How GenAI is coming for [what’s left of] media [Slides] – Doug Shapiro
AI’s latest model will change economics of software [Paywall] – Economist
The living isn’t easy mini-special
If you want to live a quiet life, live a quiet life – Susan Cain
The ‘masculinity crisis’ is actually a crisis of self-esteem – Psyche
Oliver Burkeman on the imperfect life – Behavioural Scientist
Off our beat
California Dreaming – Scott Sumner [h/t Abnormal Returns]
Which music was under-appreciated in its time? – Stat Significant
Elon Musk has been paying to level-up his video game characters – Futurism
The best time to eat dinner, according to longevity experts – GQ
“It could be Marvel”: Games Workshop and its big ambitions – BBC
Long-term bullish on the Middle East – Noapinion
Principles – Nabeel S. Qureshi
On fleeing the inferno – More To That
And finally…
“Look at your cash everyday if you wish, your bonds every couple of years, and your equities every ten years! Really, do not look at your performance more than once a year.”
– Tim Hale, Smarter Investing
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