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The past few years have been cruel for one of the UK’s biggest innovations: the humble mutual fund. We pioneered this form of democratization during the Victorian era. The London market now boasts hundreds of funds investing in everything from space venture capital to Vietnamese stocks to solar farms.
And like everything good in finance, it all fell apart. The sector was over-achieved, fired too many funds, produced poor numbers, and was dressed in long-term funk. Discounts on net asset value have in some cases exceeded 50%. The bad situation has been exacerbated not only by the funds exchanged (without active fund managers and charging lower fees), but also by the rapid growth of active ETFs, which resembles the open-ended version of mutual funds.
Over the past year or so, the sector has been surrounded by Saba, an offensive activist hedge fund led by Boaz Weinstein. In most cases, attempts to take control of various trusts have been rejected only at significant costs (marketing expenditures and buybacks that could have been used for original investment purposes).
Along the way, the bigger story is that too many wealth advisors, the traditional supporters of the trust sector — are burned by yawning discounts and poor performance, and in my view, they will probably never come back again.
The good news is that data for the first half of this year shows that the sector is in repairs. And there are plenty of opportunities for adventurous investors willing to dip their toes.
However, before you reach these opportunities, let’s look at some important facts thanks to a recent report from Deutsche Numis. The Trust Sector believes that “the 2025 course will be a record year of corporate activity,” and “a record year of corporate activity” through mergers, acquisitions, buybacks, enhanced discount management, bidding and numerous wind-blowed trusts.
Buybacks are record highs. In the first six months of 2025, it rose £4.6 billion, or 25% in the first half of last year. An additional £4.2 billion was returned through bids or windups, bringing the total return on capital to £8.8 billion. The Scottish mortgage has repurchased £822 million on its own. Smithson bought £222 million.
More importantly, in my view, 10 funds have introduced single-digit discount targets, particularly Bellevue Healthcare, and have announced Showstop annual redemption facilities.
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The impact is noticeable. Over all listed funds, the average discount at the end of last year fell from 16% to 13.5%. Assuming there are no major market conflicts, I think that number could be nearing 11% by the end of this year.
However, the most notable data points are those that are attracting the least attention. Numis compares the total revenues of all stock funds in traditional mutual funds (called OEICS) with the total price-earnings ratio of investment companies. ICS has outperformed units for over a decade in all sectors except two, the UK small caps and the Japan small caps sector.
Simply put, if you’re looking for a long-running fund manager and Alpha, then this is where mutual funds exist.
Investment companies are also the default option for those looking to invest in alternative assets such as lending or infrastructure. The traditional fund management industry continues to promote long-term asset funds (LTAFs), but we do not find any evidence that these are convincing mutual fund buyers.
So where are the opportunities? We recommend the following five: First, in the alternative space, you will see more integrations. I think I’ll observe what I call the “Highlander effect.” There is only one fund left in each niche. This means further integration of small vehicles and an expanded Survivor Fund that is likely low cost and has improved liquidity.
Second, many discounts remain stubbornly high in alternative spaces for quality funds. I highlight costumes such as international public partnerships that are still traded at a 15% discount. I think such discounts will be closed.
At the same time, despite the environment where interest rates are likely to fall, the long list (particularly) of high-quality funds (such as Greencoat UK Wind and SDCL energy efficiency) is well over 7% per year.
I have been interested in biotechnology funding for a while, but this sector has been a poor investment as it belongs to the multi-year bare market and there are still no signs of recovery. However, the UK-listed Life Sciences VC Syncona is currently shrinking and trading at a 45% discount, particularly as it trades at a 45% discount, so the stock may have real value.
I end up with something worthy of more careful attention in a more popular sector: a defensive multi-asset manager. Capital Gearing, for example, has a relentless focus on trading on PARs and reducing their discounts, but now it’s a 2.1% discount.
A large listed hedge fund, BH Macro, has been trading for years at a significant premium, but now has a 9% discount. If the market remains unstable (possibly a scenario with Donald Trump), this popular fund can approach face value.
David Stevenson is an active private investor. He owns shares in SDCL Energy Efficiency Revenue Trust
