Lord Jonathan Kestenbaum
Lord Jonathan Kestenbaum

Global capital markets are unsettled. Since the Covid-19 pandemic, wave after wave of uncertainty and economic shocks have clouded the ability to forecast company value and share prices accurately. Market prices have remained higher for far longer than most analysts have predicted, while risks from debt, rate changes, and supply-chain shocks can obscure the true value of critical economic development and global investments. Markets need transparency, both to retain shareholder confidence and to continue driving intrinsic fair value within exchanges. Without this, investors may resort to storing capital in traditional, growth-limited assets. This is a concern Lord Jonathan Kestenbaum has argued throughout his years of managing investor relations.

A plethora of causes have led to the unsettling of capital markets. Volatility abounds. The constraints at the Strait of Hormuz have coincided with both a 9% drop in the S&P 500 and a rise to new records. AI stocks have boomed, and IPOs for cutting-edge companies like SpaceX or Anthropic have pushed the limits of valuation, all while bond yields are rising due to surging national debt and expenditures in wealthy countries. Lord Jonathan Kestenbaum, a non-executive director of JP Morgan Japanese Investment Trust in London, has argued that market anxiety is likely to continue. Public markets have delivered outsized returns over recent years. Yet those returns came at a time when yields were more broadly depressed. That dynamic is changing. High valuations in public markets are increasingly derived from higher term premiums demanded by investors due to concerns over fiscal sustainability.

If public companies renege on their fiduciary responsibility to consistently deliver shareholder value, investors in public markets may begin to look elsewhere, consequently resulting in discounted valuations in various market sectors. This shift is happening through a combination of short-termism, management incentives being misaligned with shareholders, market bubbles, and a volatile global environment. The IMF has shown that stocks fall by about a percentage point during months of uncertainty, with emerging markets experiencing a greater change of 2.5 points. These risks make pricing challenging, and while some stocks periodically recover within six months, recent shocks have come so repeatedly that prices now more adequately track fear and speculation than real value. The downstream effect is uniquely relevant for British investment trusts.

Investment trusts publish net asset values (NAV), making them clear examples of when markets over- or underprice share value. When NAV is higher than the share price, a stock is priced at a discount to the value of its underlying assets. Average investment trust discounts in some asset classes increased from 2.5% at the end of 2021 to 18.8% in October 2023. Richard Stone, the chief executive of the Association of Investment Companies, has said that investment trusts, in particular, have been completely reshaped "over the past four years with unprecedented levels of M&A and share buybacks, as well as mandate changes and fee cuts to give shareholders a better deal." Several notable examples on the London Stock Exchange, like Caledonia, RIT, Scottish Mortgage, and Alliance, have all experienced considerable fluctuations in their ratings.

When a listed investment company trades at a large discount, with the share price running below NAV, this often reflects a combination of concerns – strategic drift, liquidity, transparency, sustained investment underperformance, patchy communication, wider geopolitical concerns, a lack of investor awareness, and an overall geopolitical discount.

RIT Capital Partners, founded by Lord Rothschild, traded at a premium over several of the past fifteen years. Now, however, that premium has turned into a large discount. RIT returned 13.5% in 2025, yet the discount ran above 25%. Caledonia Investment Company and Hanasa Investment Trust are also at large discounts. Manchester & London similarly runs a discount of above 25% despite a portfolio comprised largely of high-performing liquid tech stocks. This comes even as some sectors, like AI, experience sharp booms, often due to publicized speculation.

Kestenbaum, who held the position of COO at RIT Capital Partners plc from 2011-2022, has previously emphasized the need for transparent flows of information. Calmer geopolitics would help, but clarity is equally important. In the past, he pointed out that market instability is not only a challenge for institutional investors, but one that can severely impact small, everyday retail investors. "Market instability is both episodic and systemic," he told a Select Committee. The system can change. Listed companies can clarify their exposure to geopolitical risk, and more openly state disparities between their NAV and share price. The Financial Conduct Authority can play a role as well, improving cost-disclosure rules, but investment managers, especially those with a large retail following, need to think constantly and creatively about active communication with their shareholder base.

Crises can spur both investment and recession. As The Economist recently pointed out, the global oil supply shock could yet invigorate an investment boom, but these geopolitical mechanisms misconstrue the nature of the market. The gap between share price and asset value needs to be reduced in the interest of shareholder value. Lord Kestenbaum's point underlies the heart of the issue: the combination of superior performance and superior communication is the most effective route to narrowing a stubborn discount. With that said, discounts can at times present a buying opportunity too, as Warren Buffett commented, "Why wouldn't you buy a dollar for 90 cents?" However, investment trusts are discovering that the retail investor will make their investment decisions at the midpoint between greed and fear.