Defence drive
The trusts set to benefit from increased defence spending
Defence and security companies are set to benefit from a sharp increase in government spending as countries around the world modernise and strengthen their armed forces.
In Wednesday 26 March’s Spring Statement Chancellor Rachel Reeves said she intends to turn the UK into a “defence industrial superpower”. She announced an extra £2.2 billion in defence spending over the next year, £2 billion in loans to help foreign buyers purchase British defence systems, and a £400 million budget to fund a new “defence innovation” programme within the Ministry of Defence.
EU countries are also planning to boost defence spending, with the bloc recently proposing a plan to facilitate loans totalling hundreds of millions of euros to help countries meet their defence commitments. In Britain, Prime Minister Keir Starmer recently announced that the British government will be increasing spending on defence by around £13.4 billion a year from 2027.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “The case for defence stocks seems all too clear, with defence forming a central part of the Chancellor’s Spring Statement. Some defence companies have seen their share prices soar but that’s not the case across the board. We have identified the investment trusts with exposure to defence which might be best placed to benefit.”
“The case for defence stocks seems all too clear, with defence forming a central part of the Chancellor’s Spring Statement. Some defence companies have seen their share prices soar but that’s not the case across the board.”
For a table of investment trusts with defence exposure, click here.
Profits already rising
Increasing geopolitical tensions are already translating into profits. German defence contractor Rheinmetall has seen its shares go up by over 1,000% since Russia invaded Ukraine in 2022. And plenty more are expected to profit as aerospace, technology and arms manufacturers see sales rise from this renewed wave of spending.
Other firms not immediately associated with defence have also been soaring. Palantir Technologies is primarily a big data tech company but has customers ranging from the NHS to Morgan Stanley and the US Army. Its shares have risen by over 270% in the past year.
Trusts with defence exposure
Looking at investment trusts with exposure to defence stocks, Schroder UK Mid Cap Fund stands out, with more than 10% of its assets invested in defence.
Jean Roche, Manager of the Schroder UK Mid Cap Fund, said: “Our view is that we are at the start of a defence growth supercycle and that’s an area in which the UK is very skilled. Meanwhile the stocks remain attractively valued relative to their global counterparts. However, we would emphasise the importance of being exposed to the growth areas of the defence market.”
“Our view is that we are at the start of a defence growth supercycle and that’s an area in which the UK is very skilled.”
Global Opportunities Trust also has a relatively high weighting, with 7.75% invested in defence companies. That is divided between QinetiQ Group (2.46%), Dassault Aviation (1.81%), General Dynamics Corporation (1.81%) and RTX Corporation (1.67%).
Sandy Nairn, Investment Director at Global Opportunities Trust, said that the trust began building up hefty defence positions in 2021, amid increasing geopolitical tensions and concern about Ukraine: “At that time we saw defence stocks as relatively resilient, at attractive valuations with improving fundamentals. While we are positive about our holdings, as a sector more broadly, we are wondering whether it is as attractive as it once was.”
“While we are positive about our holdings, as a sector more broadly, we are wondering whether it is as attractive as it once was.”
Law Debenture Corporation has the next biggest defence allocation, with 5.33% spread across BAE Systems, Babcock International and Rolls-Royce Holdings.
BAE Systems
BAE Systems is an example of a stock benefitting from recent news about increased spending. It is a world leader in defence technology and security and has gained 36% since the beginning of 2025, with more gains expected as demand increases.
City of London Investment Trust has a large holding in BAE Systems representing 4.06% of the trust’s assets, followed by JPMorgan Claverhouse with a 2.32% holding and European Opportunities Trust with 1.85%.
Anthony Lynch, Manager of JPMorgan Claverhouse Investment Trust, said: “BAE Systems provides some of the world’s most advanced, technology-led defence, aerospace and security solutions and currently has a significant order book as companies seek to address potentially decades’ worth of defence underspend.”
Rolls-Royce
Anthony Lynch, Manager of JPMorgan Claverhouse Investment Trust, said “Whilst most people might associate Rolls-Royce with luxury vehicles, the stock actually has nothing to do with the cars and is in fact a powerful player in the aerospace market and has benefited significantly from increasing defence spending by NATO members’ governments.”
“Whilst most people might associate Rolls-Royce with luxury vehicles, the stock actually has nothing to do with the cars and is in fact a powerful player in the aerospace market…”
Many analysts agree with Lynch and are bullish on Rolls-Royce due to its defence division, which is forecast to see earnings grow by 11% a year as governments increase their spending. In addition to JPMorgan Claverhouse which has a 2.73% stake, Rolls-Royce is held by CT UK High Income Trust (2.60%) and Invesco Global Equity Income Trust (4.37%).
Stephen Anness, Fund Manager at Invesco Global Equity Income Trust, said: “Although civil aerospace is the biggest revenue generating component of Rolls-Royce, its defence related business is also significant. It is a market leader in aero engines for military transport and patrol aircraft. It also has scale in naval as well as designing and supplying the nuclear propulsion plant for all of the UK Royal Navy’s nuclear submarines.”
“Although civil aerospace is the biggest revenue generating component of Rolls-Royce, its defence related business is also significant. It is a market leader in aero engines for military transport and patrol aircraft.”
Palantir Technologies
Meanwhile, one of the most outstanding performers of the past year is Palantir Technologies, which has seen its shares rise by over 290% during the past 12 months. It is held by Allianz Technology Trust, which has a 1.78% weighting to the stock.
Pick defence companies carefully
To highlight the pitfalls of investing in this sector, QinetiQ Group, a tech company and manufacturer of military equipment, saw its shares fall by more than 25% in mid-March amid warnings about contract delays in the UK and uncertainty over future US spending.
Alan Bartlett, Portfolio Manager at Goodhart Partners, which helps run Global Opportunities Trust, said: “You need to pick with care – many stocks with more than 5% sales in defence-related areas are up multiples in the last few months. Some of that will not last but in other cases, earnings of companies are rocketing.”
