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A tale of two investment trust discounts

A tale of two investment trust discounts
August 5, 2021
A tale of two investment trust discounts

Rough as China’s regulatory crackdown has been for stocks such as Tencent  (US:TCEHY), the volatility has not gone unnoticed in the investment trust space. JPM China Growth & Income (JCGI), Fidelity China Special Situations (FCSS) and Baillie Gifford China Growth Trust (BGCG) have all had moments of serious share price weakness in recent weeks. Some of the moves have been extreme: shares in the JPMorgan trust traded at a 7.8 per cent discount to NAV as we entered the final week of July, a far cry from the small premium it has commanded, on average, in the previous 12 months. Likewise, a fairly consistent premium on the Baillie Gifford trust over most of 2021 has started to look less solid.

For some this might be a bargain in waiting, and the case of the China trusts can be a good reminder to keep a watchlist of investments you may wish to top up at moments of volatility. But the events behind the share price weakness complicate any decision-making: if the case for investing in the region has softened in the wake of the crackdown, this is not such a screaming 'buy!' after all.

We’ll be doing a deep dive into the China question in a few weeks, so I won’t go into that here. But it remains important to research the case for an investment in advance, in case volatility presents a buying opportunity but also to reassess it before diving in. Frustratingly, 'cheap' entry points can disappear fairly quickly: take the hefty premiums on infrastructure trusts that only briefly wilted away in the sell-off of early 2020, or the few weeks when Scottish Mortgage Investment Trust (SMT) shares languished on a rare discount to NAV in the early months of this year.

That said, it is worth keeping an eye out for popular trusts that quietly trade at a bigger discount than normal. That has certainly been the case when it comes to US tech. Allianz Technology Trust (ATT) and Polar Capital Technology Trust (PCT) may have posted huge NAV and share price returns in 2020, but the style rotation of more recent times has knocked their shares back. That has meant bigger share price discounts: the Polar Capital trust’s shares traded at an 8 per cent discount on 26 July versus a 12-month average of 6.1 per cent. In the case of Allianz, the shares were priced at a 6.8 per cent discount, some distance from its 12-month average of 1.7 per cent.

As with the China trusts, this share price weakness isn’t exactly unjustified. We all know the concerns about tech-heavy portfolios at a point when further growth and inflation may be due, something that also explains the travails of Scottish Mortgage shareholders earlier in the year. But the long-term case for US tech may seem more straightforward than trying to guess the future of China’s leading industries. Reassuringly, we have seen the strong recent trading updates from names such as Microsoft (US:MSFT). It should also be noted that the tech trusts have continued to post decent NAV returns in recent months, even if these look unexciting in comparison with the heights of the cyclical rebound.

Investment trust bargains can at times be found. And while there will always be some reason for share price weakness, some are less offputting than others.