Investment trust discounts widening

Equity markets have proved challenging so far in 2014 with the FTSE All-Share down 0.6 per cent year-to-date. But the difficulties could present opportunities for investors looking for cheap investment trusts.

Investment trust price discounts to net asset value (NAV) have widened by 2 per cent over the past six months, new data from broker Winterflood shows. In February 2014 the average discount across all investment trusts was 4 per cent, compared with 6 per cent in July 2014.

Analysts usually expect difficult market conditions to widen discounts, especially if they have reached historically tight levels, as recently. However, the investment trust sector average discount has remained reasonably steady.

Over one year US investment trusts have seen the biggest discount widening. In August 2013 they were trading on a 1.2 per cent premium, compared to a 2.4 per cent discount in July 2014.

Over the same period emerging market investment trust discounts have narrowed by half a per cent, from 8.2 per cent in August last year to 7.7 per cent in August 2014.

And among equity funds, those that offer yields above 2.5 per cent have an average discount of 3 per cent compared with 9 per cent for the rest.

Innes Urquhart, research analyst at Winterflood, said: "We believe that this relatively limited discount movement reflects both the changing nature of the trust universe and the resilience in demand for funds with higher yields. The universe, as defined by the FTSE All-Share Equity Investment Instruments index, now comprises 21 per cent of non-equity assets, such as infrastructure and debt. This is a growing element and often trades on a premium to NAV, reflecting its above market yield.

"Since April, discounts have widened significantly for smaller companies sectors and higher growth areas of the market, such as technology and private equity. This coincides with a market rotation away from cyclical sectors and mid/small companies towards more defensive sectors and large cap names. We believe that widening discounts can present investment opportunities, particularly for investors who are prepared to take a contrarian view."

How investment trust discounts have moved over the past 6 and 12 months