Investor Insights: AI bubble worries? Investment trusts could offer protection as discounts narrow

Valuations have risen and investors are questioning whether AI is in a bubble. It’s not really for me to say – it has a lot of the hallmarks of a bubble, yet it seems there is still juice to be squeezed. The fear of becoming obsolete could drive an acceleration in AI capex in 2026, whilst it also looks set to broaden into different industries (Pharma and Financials are yet to really show us the money in terms of AI benefits) and geographies, as investment extends beyond the US. Note for example the news this week of mega AI investments in India.

As detailed in my look at some stocks to consider in 2026, I see three key threads in 2026 regards the AI trade – acceleration, broadening and monetization.

Another theme we are looking at – correlated to the broadening and monetization elements of the above - is that this is truly becoming a stock pickers universe again. The AI juggernaut continues (for now) but the broadening means we are looking at a market that will deliver winners and losers.

That’s why I think it’s a good time to look at investment trusts once again. These investment vehicles deliver actively managed exposure to wide universe of sectors, geographies and themes. Broadening in the AI trade – and some Trump-inspired shift out of the US – means anything that reduces concentration in the big AI names is helpful.

And with interest rates coming down in the UK and the chancellor cutting the cash ISA allowance, income-focused savers are looking harder at equities and bonds. Equity income-focused investment trusts can be a good place to look for a large number of investors who don’t want to ride the AI tiger.

After a torrid period in 2022-23, the sector is coming back to life. Recent corporate actions have helped – mergers, buybacks etc.

Many of these are currently trading at a discount to their net asset value – i.e. the value of the shares is less than the value of the assets the trust owns. Potentially this suggests there is value to be found in a sector that has struggled a bit against the rise of passive ETFs. Strong performance should improve demand for shares and narrow discounts, although we have already seen this play out in 2025 to some extent. The question will be whether the sector can get a lift in 2026 to further narrow some of the discount.

Growth capital trusts have enjoyed a noticeable narrowing in discount lately, but these are often highly concentrated so the discount may not seem as appealing as it once did. Growth capital trusts invest in unquoted names as well as listed stocks, and focus on early stage companies.

Seraphim Space (SSIT) for instance has seen its discount to NAV narrow considerably from around 40-50% in late 2024, to 29% as of 11 December after a rebound in the shares. It’s up another 54% YTD but carries concentration risks – 37% of its NAV is in the unlisted ICEYE.

Other growth capital trusts that have seen their discount narrow is Schroder British Opportunities (SBO)and Chrysalis (CHRY).

Discounts have also narrowed in a number of India-focused trusts, for instance JPMorgan India Growth & Income (JIGI) and Aberdeen New India (ANII), both thanks largely to corporate actions.

EM has been a solid hunting ground for trusts too and we have seen discounts narrow, largely due to the performance of China, though some meaty discounts remain. For instance Utilico Emerging Markets Trust (UEM)has seen its discount to NAV almost halve from 20% to 11% in the last year.

Renewable energy, on the other hand, has been an area where discounts to NAV have widened thanks to some uncertainty around regulations in the sector

Many trusts however trade at a premium to NAV – usually this is because of a strong track record inspiring a high level of trust among investors, or because the trust acts as the sole access to a particular company or sector.

For instance, the JPMorgan Emerging Europe, Middle & Africa trust trades at a 277% premium today because investors reckon that its Russian assets might have a value more than zero.

Private equity group 3i (III) trades on a premium as it’s the only way investors to get exposure to Dutch discount retailer Action, plus it benefits from passive flows from being listed on the FTSE 100 index. On the other hand, HarbourVest Global Private Equity (HVPE) trades at a 30% discount to NAV and has several potential candidates to go public in the next year, including Ai-focused data company Databricks and financial services group Stripe.

UK-focused trusts have done well lately as the FTSE has run higher this year – Temple Bar (TMPL), for instance, which invests in Johnson Matthey, Shell, BP and NatWest among a portfolio that is 70% geared to the UK, has seen its discount flip to a premium. Merchants Trust (MRCH), which has a similar profile, still trades at a 5% discount to NAV and offers a 5% dividend yield.

City of London Investment Trust (CTY) trades on a small premium thanks to a strong track record of outperforming the market while offering an attractive dividend yield of more than 4%. It boasts a 59-year record of dividend growth, making it the investment trust with the longest record of annual increases.

And CQS Natural Resources Growth and Income (CYN)– which has risen to the top of our trusts list this year, has flipped to a premium after an 80% rally YTD.

An investment trust is a public limited company traded on the London Stock Exchange that pools shareholder investments to invests in other companies.

Investment trusts have been around for at least 150 years in the UK. The rise of exchange traded funds and DIY platforms have democratised investment in the last few years, but there is if anything an even greater focus on investment trusts than ever as the government pushes for more people to invest. 

What are the advantages of investment trust?

Passive and active ETFs have set expectations for low fees, liquidity and transparency. Investment trusts cannot easily compete with them on those fronts so instead the focus should be on the positive attributes that they offer, such as consistency, long-term value creation and, perhaps crucially as we enter 2026, access to private assets. Investment trusts can offer private investors access to liquid assets such as unlisted stocks, infrastructure and renewables.

Reserves can be used to smooth dividend payments, allowing for more consistent income and returns, while their closed-end structure means redemptions do not automatically force managers to sell stocks at the worst times.

How Investment Trusts Work

At heart, investment trusts are simply companies that invest. Their structure provides several distinctive features:

1. Discounts and Premiums

Trusts often trade at a discount (below the underlying asset value) or premium (above NAV).

Discounts can provide value opportunities—but may persist for years.

Premiums usually signal strong demand, reputation or structural scarcity.

2. Gearing (Borrowing)

Trusts can borrow to increase exposure to the market.

Can boost returns in rising markets.

Amplifies losses in falling markets.

3. Independent Boards

Unlike open-ended funds, they have boards that hire or fire managers, manage discount-control policies, and negotiate fees.

4. Ability to Hold Illiquid Assets

The closed-ended structure allows managers to invest in private companies, infrastructure or property without worrying about daily redemptions—one reason private-equity trusts boomed post-2010.

Pros and Cons of Investing in UK Investment Trusts

Pros

✓ Access to specialist strategies

Private equity, renewables, infrastructure, space tech, biotech—areas difficult to access via open-ended funds.

✓ Potential for bargains via discounts

Buying £1 of assets for 80–90p is possible when discounts widen, particularly in periods of risk aversion or high interest rates.

✓ Dividends often smoother

Many trusts have “revenue reserves” they can use to maintain or grow payouts even in volatile years.

✓ Structural stability

Managers are not forced to sell assets when investors withdraw, allowing longer-term, less liquid strategies.

✓ Gearing can enhance performance

Selective and well-timed borrowing boosts long-term returns (e.g., for growth-oriented trusts).

Cons

✗ Discounts can stay cheap for a long time

A trust on a 20% discount is not guaranteed to re-rate. Persistent discounts are a major frustration for retail investors.

✗ Gearing cuts both ways

Leverage magnifies losses during drawdowns, hitting both NAV and share price.

✗ Higher fees than some ETFs

Specialist asset classes often involve higher management fees and performance fees.

✗ Liquidity varies

The largest trusts trade heavily, but smaller/specialist trusts can have wider spreads and lower volumes.

✗ Sentiment-sensitive

Changes in interest-rate expectations, politics, or money flows can move discounts sharply, even if the underlying assets perform steadily.

Who Are Investment Trusts Suitable For?

Investment trusts suit investors who want to think long-term and who understand the mechanics of discounts, gearing and liquidity. They can be a powerful core holding in a diversified ISA or SIPP—especially global equity income or multi-asset trusts—and a gateway to more specialist exposures like private equity or infrastructure.

For investors comfortable with the quirks of the structure, the sector offers some of the most interesting value opportunities in UK markets today.