- If trusts capture the hottest trends, investors often have to pay up for exposure
- We look at where cheap entry points appear to have emerged
With origins stretching back to the 1800s, investment trusts have maintained their relevance by constantly adapting to a changing world.
That much has been clear in the last year. Trust launches and secondary fundraising efforts have tended to focus on future trends, from renewable energy to digital infrastructure and even space exploration. We’ve also seen existing trusts adapt to change, with names such as Keystone Positive Change (KPC) freshening their remits.
If investor demand forces the industry to embrace change, it also has an inevitable effect on prices. This can be a double-edged sword for investors who might find bargains in unloved areas but often pay up for the hottest trends.
The most extreme valuation stories in the closed-ended space have been widely discussed. Many infrastructure trusts continue to command share price premiums to net asset value (NAV), while most of the private equity funds languish on big discounts despite strong returns. Other opportunities had become apparent as we moved into November – although as always they may not last long.
Home bargains
To give a sense of price trends, our chart shows average discounts and premiums in selected Winterflood categories at the start of November, and how they compared with 12-month averages to the same date.
What’s striking is that some UK trusts appeared to be trading at attractive valuations even after a year of strong performance. This is especially notable further down the market cap scale: all three of the mid cap names, Schroder UK Mid Cap (SCP), Mercantile (MRC) and JPMorgan Mid Cap (JMF) traded at discounts notably wider than their 12-month average.
Multiple small cap names also traded on wide discounts relative to recent history. JPMorgan UK Smaller Companies (JMI), BlackRock Smaller Companies (BRSC) and Henderson Smaller Companies (HSL) were among those on the biggest discounts versus recent history. Some generalist UK funds have also traded more cheaply, from Baillie Gifford UK Growth (BGUK) to the more value-oriented Aurora Investment Trust (ARR).
Analysts at Stifel suspect the recent share price weakness could stem from profit taking on small and mid caps after a year of strong performance, but also from worries about interest rate rises and the state of the UK economy. Yet they remain sanguine.
“We think some concerns on the UK economy and interest rate risks may have been overdone,” they said in a recent note. “If we see a traditional year-end rally this is also likely to give these trusts a boost.”
As noted, readers should remember that such 'bargain' prices can be fleeting. Conversely, some discounts can be stubborn, especially if they relate to persistent issues with a given trust or sector.
Further afield
Elsewhere, certain special situations might offer value while they last. One might be Fidelity Emerging Markets (FEML). The trust moved to a notably wider discount in October after Fidelity took it over from Genesis. Existing shareholders have seemed keen to cash out, with a recent tender offer for shares proving to be heavily oversubscribed. Yet Fidelity may well be able to rein in the discount over time, both due to its investment performance and the asset manager’s marketing clout.
It can also be worth watching mergers to see if a trust acquiring a peer trades at a cheaper level. JPMorgan Global Growth & Income's (JGGI) shares traded at a modest discount at the start of November, not long after the proposal for it to absorb Scottish Investment Trust (SCIN).
Elsewhere, investors with a longer-term mindset may still be interested in growth funds that have taken a knock this year. The major technology trusts and several global equity names run by Baillie Gifford, including Monks (MNKS) and Edinburgh Worldwide (EWI), have traded more cheaply than usual. It should also be noted that some of the biotechnology and healthcare trusts, including Worldwide Healthcare Trust (WWH) and Biotech Growth Trust (BIOG), have recently traded at cheaper levels versus NAV than usual.
China’s regulatory crackdown also continues to have an effect, with names such as Fidelity China Special Situations (FCSS), Asia Dragon (DGN) and Schroder AsiaPacific (SDP) trading at cheaper levels alongside emerging market vehicles including JPMorgan Emerging Markets (JMG). In a separate development, Civitas Social Housing (CSH) and Triple Point Point Social Housing (SOHO) have moved to wider discounts as questions loom about the former.
