With interest rates falling, equity income trusts are drawing renewed investor interest for their blend of progressive, growing dividends and capital appreciation.
In this column, Josef Licsauer, investment trust research analyst at Kepler Partners, explains why equity income trusts are regaining their relevance – and looks at four examples investors may wish to consider.
When inflation began to surge in late 2021, interest rates climbed rapidly, peaking at 5.25 per cent in 2023. Savers suddenly had little reason to stray from cash, as a simple savings account offered more than five per cent.
Elevated rates and ongoing market volatility also drew investors toward other high-yielding, lower-risk alternatives like government bonds.
Now, that backdrop is shifting. Interest rates are falling with the Bank of England already cutting its base rate to 4 per cent as of August 2025, with further reductions expected.
Payout: Equity income trusts are regaining popularity among investors
Even if these cuts reflect a softening economy, they change the equation. The easy yield from cash is diminishing, and investors seeking income are being nudged back up the risk curve.
In this environment, equity income investment trusts have been regaining appeal. After years of derating, discounts have begun to narrow across much of the sector, notably with equity income focused strategies.
Performance has improved and sentiment has turned, perhaps reflecting investors’ recognition of their ability to deliver a reliable and often progressive income, alongside the potential for long-term capital growth, a combination that cash and bonds alone cannot replicate.
Across the equity income space, discounts are narrowing as investors reappraise the blend of income and capital growth these vehicles can offer.
Aberdeen Equity Income
A clear example is Aberdeen Equity Income, where the discount has tightened from double-digit levels in 2024 to a brief premium in June this year, and at the time of writing is close to par.
AEI has been at a discount relative to the UK equity income sector over the past two years, and its valuation has re-rated more sharply than the sector average.
Whilst index outperformance played a role, I think it coincides with rate changes, meaning the standout re-rate driver has been its premium yield.
AEI currently yields 6.1 per cent, well above the FTSE All-Share Index’s 3.4 per cent and the UK Equity Income sector average.
Manager Thomas Moore blends high-yielding, reliable dividend payers with smaller companies that offer both income and growth potential.
This strategy aims to deliver a steady and progressively growing dividend whilst also providing the potential for capital appreciation, a combination increasingly attractive as returns from cash and government bonds become less compelling.
Josef Licsauer, Investment Trust research analyst at Kepler Partners, explains why equity income trusts are regaining their relevance
Cordiant Digital Infrastructure
For more adventurous investors, or those looking beyond traditional equity income strategies, alternative income vehicles are also starting to re-rate.
Cordiant Digital Infrastructure, which invests in the backbone of the digital economy, from fibre networks to data centres, has seen its discount narrow from 48 per cent to 23 per cent at the time of writing.
Investors appear drawn to its blend of structural growth exposure and a competitive 4.4 per cent yield.
Whilst CORD still trades on a wide absolute discount, this may present scope for further reappraisal if momentum continues, particularly as falling rates prompt a rotation out of cash into more resilient, income-generating alternatives.
3i Infrastructure
3i Infrastructure offers another contrasting route. Unlike many traditional infrastructure vehicles, which rely on new project pipelines to sustain NAV growth, 3IN owns and actively manages a portfolio of real operating businesses.
This brings a different risk profile, more concentrated and with higher operational exposure, but also greater scope for both NAV and dividend growth. Since IPO, the trust has increased its dividend every year, with the last five years delivering six per cent compound annual growth, comfortably ahead of inflation.
The current yield sits at a modest 3.9 per cent, but is supported by a progressive dividend policy targeting further growth and long-term total returns of eight to ten per cent.
With its discount narrowing from a wide 22 per cent to around nine per cent today, I think the re-rating reflects both strong performance and recognition of its differentiated offering: a hybrid of income and capital growth that feels particularly well suited to a lower-rate environment.
The trend is gaining momentum elsewhere too, notably in Europe. With US valuations stretched, political uncertainty mounting and signs of an economic slowdown, investors are increasingly looking beyond US growth stocks in favour of more balanced income and value opportunities.
JPMorgan European Growth & Income
JPMorgan European Growth & Income has been a beneficiary. Its discount has narrowed from 13.5 per cent in October 2024 to just 2.8 per cent at the time of writing.
This highlights the broader shift in sentiment toward differentiated European income strategies.
Performance has been strong but what sets it apart from peers, however, is its distinctive income profile: a quarterly dividend equal to four per cent of NAV annually, partly funded through reserves, which gives the managers flexibility to pursue capital growth without sacrificing income.
This structure allows JEGI to deliver an above-market yield, reinforcing its appeal in a lower-rate environment. Recent consolidation within the European trust sector may also have boosted demand.
Invesco Global Equity Income
Finally, the global equity income space is seeing similar dynamics, with Invesco Global Equity Income exemplifying this. Following its 2023 restructuring and enhanced dividend policy, it’s moved from a wide double-digit discount to a small premium.
Its contrarian, mid-cap-biased strategy is markedly different from US mega-cap-focused peers, offering investors both diversification of income streams and drivers of capital growth.
For investors rotating away from crowded US growth trades, IGET’s discount movements underlines the renewed appeal of actively managed global equity income trusts in today’s lower-rate, more selective market.
Trusts are becoming more relevant
Equity income investment trusts have clearly regained their relevance amid falling base rates and renewed appetite for dividends.
That said, a fair challenge remains: whilst cash savers may be nudged back into equities, ten-year gilt yields around 4.7 per cent could still limit how much capital rotates from fixed income, meaning the shift is not uniform across all holders of lower-risk assets.
Another potential push back would be the observation that certain trusts now trade at premiums or very narrow discounts, so the traditional argument for buying at a discounted level may not hold as strongly.
However, value still exists in what these strategies offer for investors over the long run: meaningful yield, long-term capital growth potential and differentiated mandates that can add genuine diversification to a portfolio.
In many cases, renewed appeal is less about the current discount or premium and more about the quality and uniqueness of the strategy itself.
Taken together, I think the overall movement in sentiment is encouraging. Investors appear increasingly discerning, recognising clarity, quality and distinctiveness.
Whilst discounts could widen again and premiums rarely last forever, investment trusts continue to offer income strategies that are differentiated from more traditional sources, providing resilience and long-term relevance in portfolios.
This feels particularly valuable as the allure of cash diminishes, investors look beyond the US, and global uncertainties persist.
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