All Newsletters29 April 2026

Special Newsletter on Discounts

The Macro mechanics that drive Discounts, not the myths.

In this section, we wish to to take an objective look at the Macro drivers of UK Investment Trust discounts. We will show that they are actually dictated by three exogenous factors: Fund flows, Bank base rates and Behavioural Economics, and one internal factor: the ownership structure of the Fund’s Shareholders.

Factor 1: Fund flows.

The key structural issue driving discounts is the long-term decline in the share of UK household financial assets allocated to equities and fund units.

Using the national accounts concept AF.5 (“Equity and investment fund shares/units”) as a share of total household financial assets (AF.A), this share has decreased from 22.2% in 2000 to 15.9% in Q2 2025 (covering both UK and global equities and fund units). A shrinking TAM is a structural headwind for any business operating within it.

As shown in the below chart, the amount of money in UK investment funds has been declining since 2016. If we overlay the average investment trust discount (excluding PE/VC-style funds) on the UK Household Wealth in Investment Funds, there is a clear relationship. This is a clear mathematical correlation of 0.68.

For context, the US equivalent Household investment in Funds metric looks very different, with a clear upward trajectory in the underlying asset base:

We have made this point previously in a factsheet when we asked just what more Ben Rogoff has to do to rebalance the supply and demand of PCT shares through the market?

If you tell an American manager that you have delivered >15% annualised for a decade and yet investors still sell, they typically look at you in disbelief. With UK job security low and energy inflation rocketing due to failed government policy, the general flow into investment funds is predictably woeful. We are trapped in a “rentier state” where the Press insists that Bricks & Mortar are the only viable investment, even as youth unemployment reaches revolutionary levels and a massive crisis of economic inactivity, driven by long-term sickness and an ailing NHS, shrinks the tax base daily.

Even for those who manage to save, the reward is aggressive over-taxation and the suffocating “Fiscal Drag” of frozen tax thresholds, which punishes any attempt at building personal wealth. When capital does finally reach the markets, it is channelled into the “Zombie Market” of the LSE, where liquidity is dying as growth companies flee for US listings. Investors are pushed into UK-focused Value Funds that have woefully underperformed International Growth for years, while our own pension funds have abandoned British innovation to fund government debt through Gilts. Combined with a planning system that treats productivity-boosting infrastructure as a nuisance, the UK has become a high-tax, low-growth museum. Investors aren’t being “unpatriotic” by moving their money abroad; they are simply refusing to participate in an misguided “safety-first” suicide pact.

ii) – Factor 2: UK Bank Base Rates

Base rates are another major external variable driving discounts. Winterflood researched this point and summarised:

“When deposit rates are high, investors can earn 4–5% effectively risk-free, which reduces demand for equity income trusts and widens discounts. When deposit rates fall, that “safe” yield disappears, investors re-engage with trusts and alternatives, and discounts typically narrow. This has been visible across rate cycles (e.g., 2019–2021 ultra-low rates saw many income trusts trade at premiums; 2023–2024 higher base rates coincided with sharply wider discounts across many sectors). As markets increasingly price in rate cuts, brokers have also commented that discounts should begin narrowing.”

In summary:

When deposit rates are high, investors can earn 4–5% virtually risk-free.
👉 Demand for equity income trusts (yields of ~4–6%) weakens, as the risk premium looks less appealing.
👉 Discounts widen.
When deposit rates fall, that “safe” cash yield disappears.
👉 Investors start searching for yield again in equities, trusts, and alternatives.
👉 Demand improves and discounts narrow (trust share prices rise faster than NAVs).

📉 Quantitative Correlation Evidence
Academic and sell-side analyses suggest there is typically a negative correlation between interest rate level (or deposit yield) and average investment trust discounts. In Winterflood’s historical datasets, a 100bps fall in the base rate has often coincided with 2–4 ppts narrowing in sector average discounts.

Our own research confirms this. The below chart shows the clear negative relationship (correlation -0.71) between average investment trust discounts and the UK bank rate. Again we stress the point: This is a clear mathematical correlation of -0.71.

iii) Factor 3: Behavioural Economics: UK Investor Expectations

Apart from the obvious behavioural follow throughs that the UK retail investor’s risk appetite tends to be constrained when taxation is rising, inflation is elevated, and/or unemployment is increasing, there are a number of other behavioural factors that are driving demand away from Investments Funds in the UK. UK Investment Funds are seen as out of touch whose social media engagement is boring and uninformative wrapped up in dire risk warnings..

However, the more worrying point is that with social media promoting the immediate riches of the likes of bitcoin, gold, other Ai trading schemes are UK Investment Funds realistically able to fight back? Do the regulators even allow them to fight back?

The point is that as Social Media has reduced a generations’ attention span and it has also reduced investment duration patience. Our shareholders that buy the fund through platforms such as HL will tend to churn the shares regularly. Now why would that be happening so much more today than in the past? Katie Potts once wrote a very good article in a UK broadsheet about how during the life of HRI the shareholder base changed from Pension Funds to Discretionary PCIMs to Retail Churners.

The older generation retreat into a “Tangibility Bias” and the Press peddled “Its my Castle myth” for bricks and mortar which is a physical security blanket against a fear of the digital future, and the younger generation gamble on “Get Rich Quick” schemes as a psychological rebellion, a million in one punt on financial liberation.

Conclusion on the first three Factors:

All 3 factors above are Macro issues in the UK. It is obvious to the financially literate, that a Manager of a fund can NOT control Factors 1 to 3 detailed above. There are many very obvious solutions to all the problems we have detailed above BUT they are not in the control of a UK ITC Fund Manager.

As Mark has written countless times in his newsletters, attempting to control discounts is akin to Canute commanding the tide. We had this discussion with Ben Rogoff, the Manager of PCT, and he was clear: his focus is always exclusively “Performance, Performance, Performance.” As Seneca wrote, “It is not that we have a short time to live, but that we waste a lot of it. Life is long enough, and a sufficiently generous amount has been given to us for the highest achievements if it were all well invested.” Our 3 year NAV total return is c.140%. The discount difference in that time is ~10%. It is clear what we should focus our time on.

iv) Factor 4: Ownership Structure of the Fund & the SABA effect

SABA are closing discounts. Once they have appeared on a Share Register that is vulnerable then discounts do close in anticipation of SABA winning the long term game of attrition. Having watched their success in terminating a number of funds, the independent arb is starting to bet that SABA’s attention will ultimately close the discount.

BUT there is a cohort of investment trusts, often called Family Controlled Investment Trusts, that it would be logically inconsistent for SABA to wage a Long Term war against as they will never control the vote. I stress Long Term because there may come a day that SABA Buy then Sell with the cycle of discounts. Due to the likelihood of a lower probability of attack from SABA these funds trade without the “SABA Kill Hope” and hence trade on a wider discount. This cohort is shown below:

OK but can we try on a more Micro level to help the discount?

At this point, lets reframe the question. Where would Mark like the discount? Answer: 0 per cent.

Marcus Aurelius: “There is never any need to get worked up or to trouble your soul about things you can’t control.”

So we will follow the Stoic master and focus on Performance.

However, we have set out below how we see a route back to a narrower discount.

Keep Shareholders Informed

There is an article in the FT by Maike Curry saying that discounts will close with better social media engagement. The article is linked here.

If you review our LKND site you will struggle to find any UK ITC posting as much data to keep their Shareholders informed: https://www.linkedin.com/company/mnl-ln

Please do review the posts on this site and you will see we believe we provide far more financial and portfolio information than any other UK ITC.

Enhanced Dividend Yield

One lever we can implement is yield support, which is why we announced a c.5% dividend yield (based on the Company’s indication to pay out at least 40p per share annual dividend over the next five years, calculated using the MNL share price as at 6 January 2026).

Higher yielders tend to trade on lower discounts:

The path we hope for, If the Macro turns to a Tailwind

If we can keep plugging away at the above. If we keep paying attractive Dividend yields.

If we can keep Performing as per the below:

AND UK Interest Rates drop ALONGSIDE Fund Flows turning positive again, Then, may be, we could see the halcyon days of before when our discount was sub 10 per cent and, at times, even switched to a Premium. Yes we hope so too.