Investment trust discounts could tempt back tech buyers

The hiking of interest rates proved a major headwind for our Alpha Investment Trust system, but now there are signs inflation is cooling, there is an argument that the trust discounts can be exploited. Although this view has merit, it is still wise to exercise caution.

As Triumph of the Optimists authors Dimson, Marsh and Staunton point out, equities are not a hedge against inflation shocks - share prices are too affected by interest rate rises and margins are hurt by rising costs. Over time, however, the compounded returns of companies have a fine record of outpacing inflation and this dynamic means that when investors have the opportunity of a reasonable entry point to invest in quality companies in structural growth sectors they should consider them seriously. 

Whether that entry point has arrived is still up for debate, but with signs of lower inflation in many parts of the world, markets have shown signs of optimism that the steepest spells of interest rate hikes which have hurt quality and growth stocks  are done with. That conclusion may be premature given core inflation remains sticky, but perhaps the discounts already baked into some investment trusts offer an added margin of safety. 

Discounts can always widen further of course, but where underlying assets invested in by the trusts are liquid-listed companies, some of the  wide gaps to NAV that exist may have gone far enough. Despite all the buzz around AI and automation it may still be early to pile back into big tech, but we note with interest the presence in this month’s Alpha Investment Trust report of the large technology trusts. Polar Capital Technology (PCT) and Allianz Technology Trust (ATT) are well known to investors and both sit on discounts roughly one standard deviation below the average. The question is, where to anchor expectations of a fair valuation equilibrium in a world that may not get back to the previous low interest rate regime any time soon.

Our two featured trusts this month aren't solely tech focussed but are certainly tech exposed and are both trusts that have long-term investing strategies that are cheaply valued and will benefit tremendously if the pace of rate hikes has indeed peaked.