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Investment trust stability and the art of doing nothing

Investment trust stability and the art of doing nothing
February 10, 2022
Investment trust stability and the art of doing nothing

The January sell-off may have felt pretty rough for UK investors’ favourite funds, but that isn’t entirely obvious from one metric.

In the investment trust space, big price falls for growth stalwarts such as Scottish Mortgage Investment Trust (SMT) have failed to create notable share price discounts for any decent period of time so far this year. In the case of Scottish Mortgage the share price discount to net asset value (NAV) moved out sharply for a very brief spell last month before coming back in. As Stifel recently noted, this fits in with a broader trend that might frustrate bargain hunters. Many well-known growth names are back to business as usual with their shares trading at close to NAV, while value plays in many cases continue to languish on big discounts.

To give one example the broker points to some of the UK small-cap vehicles. Value-minded Aberforth Smaller Companies Trust (ASL) fared relatively well in January, with its shares only dipping modestly, while growth plays like BlackRock Throgmorton Trust (THRG) and Henderson Smaller Companies Investment Trust (HSL) suffered big price falls. But as Stifel notes the discount/premium dynamic for all three has remained “relatively constant”: BlackRock Throgmorton’s premium has moderated slightly, while discounts on the other two have widened just a tad.

Explaining price moves (or the lack thereof) is a tricky business, but investors may simply have sat on their hands amid a bout of uncertainty or been happy to maintain their current positioning. The path forward might seem even harder to navigate than usual. It’s notable that fund manager James Thomson struck a cautious note in a recent interview with the IC, arguing that he had “selectively” topped up some holdings, but would need clarity on the outlook for monetary policy before enthusiastically buying the market dip.

When it comes to private investors a good balance may have been struck, if lists of the most popular January investments on the biggest platforms are anything to go by. interactive investor and AJ Bell customers favoured certain tech funds and products from the likes of Baillie Gifford and Fundsmith, while some more cyclical names also made an appearance. A list of the biggest net fund buys on Hargreaves Lansdown during that month seems to feature a wider variety of names, although LF Blue Whale Growth (GB00BD6PG563) did crop up.

Some trust sub-sectors have bucked this trend and seen more meaningful shifts. As Stifel notes, this has included US smaller companies trusts and some of the dedicated tech funds. We’ve also seen a decent level of tightening in some areas viewed as inflation hedges, from BlackRock World Mining Trust (BRWM) advancing from a discount to a small premium in recent weeks to the hefty discounts on real estate trust shares falling back somewhat. BMO Commercial Property Trust (BCPT), a notable victim of the lockdown era, has seen further tightening in January, taking it a long way from share price discounts of more than 60 per cent in March 2020.

Either way, investor calm and portfolio diversification may be the best ways to get through an unpredictable period for markets. But the recent bout of discount stability also reminds us that investment trust 'discounts' don’t always play out as we hope. A 'wide' discount won’t always tighten – although a strong run of share price returns should be justification in itself.