- The value rally of the last half year has had a big effect on investment trust shares
- We look at where discounts and premiums look more noteworthy
November’s vaccine news has been quite the gamechanger for markets. Roughly six months on from the “Vaccine Monday” of 9 November, when the Pfizer BioNTech Covid-19 shot was reported to have an efficacy of 90 per cent, many previously unloved cyclical sectors are sitting on decent gains. A fierce value rally has dominated this period, with MSCI World Value index making a total gain four times greater than that of its growth equivalent from 9 November to 20 May.
If the last decade has taught us anything about factor investing, it’s that value rallies can prove notoriously short-lived. The value style delivered rich returns in the second half of 2016, for example, only for this momentum to peter out at the turn of the year. But putting these uncertainties aside, the price action of the last half year has made a big difference to how some of your holdings may be valued. In the investment trust space, it is worth assessing what exactly has happened – from old favourites now looking less expensive to the evaporation of certain bargain opportunities.
Bargain hunt
As in previous assessments we have shown the recent average share price discount or premium to net asset value (NAV) in a given sector, as classified by Winterflood. While we would normally compare this figure with the average from the 12 months up to the same date, this time we have instead contrasted the recent sector discounts and premiums with those from the morning of 9 November, just before the vaccine news upended markets. As such, you can see the full extent of the changes.
On the face of it most areas have made gains to different degrees, with the average discount tightening or a premium emerging. This would suggest that few bargains can be found. But, as always, averages offer just one view of the data, and a few names are in fact trading at lower levels relative to their NAV than before. Given the market moves we have outlined, it is unsurprising that these tend to be growth-oriented funds and those with a focus on sectors that previously led the market. While we cannot predict the future of these sectors or different growth styles, this may be a chance to top up on shares in a trust you already rate as a holding for the longer term.
Towards the end of 2020 we asked whether investors should take profits on trusts that had made phenomenal returns for the year. It is some of these names that may now offer a more palatable entry point, provided you still view them as good long-term holdings. Allianz Technology Trust (ATT), which ended up making an 80 per cent share price total return in 2020, saw its shares trade at a 4.3 per cent discount to NAV on 17 May, a notable widening from the 0.1 per cent discount the shares traded on at the start of 9 November 2020.
Some, but not all, of the 2020 winners we discussed have moved to 'cheaper' entry points for investors, even if these are only small shifts. This applies to some of the high-flying Baillie Gifford-managed trusts: the share price premium on Pacific Horizon Investment Trust (PHI) moderated from 14.5 per cent just before the vaccine news to 8 per cent on 17 May. Scottish Mortgage Investment Trust (SMT) shares recently traded at a 1.9 per cent discount, out from 0.4 per cent. Even though Scottish Mortgage shares moved out to a wide discount earlier this year, discounts and premiums here tend to be fairly limited. Elsewhere, Fidelity China Special Situations (FCSS), another strong performer of 2020, moved from a 1.1 per cent discount in November to a 2.5 per cent discount in May.
Beyond the top performers of 2020, a few other names have also seen their share prices slip versus NAV. European Opportunities Trust (JEO), a name we discussed at length earlier this year, has moved out to an even wider discount, which came to 12.8 per cent on 17 May, potentially due to the manager’s focus on secular growth stories.
Interestingly, several names in the highly rated renewable energy infrastructure space have seen their share price premiums fall back, although potentially with a valid reason. The fallback may partly relate to the March Budget. The announcement of a plan to increase the rate of Corporation Tax would in particular hurt the NAVs of some renewable and generalist infrastructure trusts, while weaker power price forecasts have also been blamed for some softer performance. Names such as NextEnergy Solar Fund (NESF), The Renewables Infrastructure Group (TRIG), Gore Street Energy Storage (GSF) and Bluefield Solar Income Fund (BSIF) were on notably lower premiums on 17 May than they were in November.
Given that significant premiums persist across much of the sector, and the investment approaches can vary considerably, it is worth carefully researching the options. Most generalist infrastructure trusts, which also offer a source of seemingly stable income, have seen their share price premiums remain fairly static.
Cheap no more?
It can never be said too often that a premium or a discount is just one metric, and tells us little on its own about a particular investment trust's merits. A trust’s shares can perform strongly for years while remaining on a discount, as they could even if a big premium makes them look expensive. But discounts can still present more palatable entry points at times, while big premiums can potentially collapse if a trust disappoints.
As the chart shows, some sectors have seen big wins in the past six months or so. In the 'growth capital' grouping a very strong run for Schroder UK Public Private Trust (SUPP), the former Woodford Patient Capital Trust, has resulted in its discount shrinking from a whopping 39.6 per cent on 9 November to just 3.9 per cent more recently. Chrysalis Investments (CHRY), meanwhile, has at times commanded a double-digit share price premium.
'Cheap' opportunities may now be harder to come by. The huge rally in UK equities means many discounts have dwindled or disappeared, as with value-oriented Fidelity Special Values (FSV). The same applies to some sector plays: commodities trusts have made big gains, while Polar Capital Global Financials Trust (PCFT) went from a 9.5 per cent discount on 9 November to a 2.6 premium on 17 May.
Certain sectors remain out of favour, although potentially with good reason. Take the UK commercial property sector: the average discount has tightened significantly, but still came to nearly 13 per cent on 17 May. Names such as BMO Commercial Property Trust (BCPT), which are heavily exposed to assets hit hard by various lockdowns, still trade on big discounts which may lure in adventurous, contrarian investors. By contrast, many private equity trusts have performed well but tend to trade on big discounts, even after share price gains.
