- We cast an eye over investment trust pricing, with a few anomolies emerging
- Some funds have grown 'cheaper' even as performance holds up well
Investment trusts went on sale for good reason in early March. As geopolitical strife rattled markets, more than 50 trusts saw their shares trade on discounts to net asset value (NAV) not seen for 12 months or more. For brave investors, or those with a carefully-built watchlist of funds, this may well have represented a time to dive in.
Fast forward a couple of months, and the picture is less clear. Many trusts have recovered somewhat even as uncertainties linger, with discounts narrowing versus the levels we observed in early March. But there is still some good news for bargain hunters: if less obvious than before, some possible opportunities are still apparent.
It’s not surprising that some trusts, having fallen victim to recent events, are still on optically 'cheap' valuations but with clear risks, from the dedicated tech funds to European, emerging market, Asian and China portfolios. But certain names have held up well amid the volatility of the past six months, and still trade at wider discounts than normal, suggesting a mispricing.
As always, it’s worth reiterating that price should absolutely not dictate your choice of fund. There are many cases where discounts or premiums may well be justified and can simply grow over time. Instead of obsessing over price, it pays to favour funds based on their other merits. A wider than normal discount may then offer an opportunity to top up or establish a position, provided the investment case has not changed on the back of events. Conversely, rich premiums can be a good prompt for caution and further due diligence.
Still, a snapshot of discounts in the final week of April indicates that a handful of trusts traded at 'cheaper' levels despite good NAV returns amid recent volatility. For the sake of simplicity, we have confined our analysis to equity-focued trusts.
Doing well but selling off
The broad sell-off has been hard to avoid for most trusts, and many are sitting on some level of NAV loss from the last six months or so. But certain names have thrived or endured less pain than their peers, and still trade on attractive valuations relative to their own recent history.
Some of these funds invest in sectors knocked the hardest by recent events. In Asia, Winterflood data indicates that the average Asia Pacific Ex-Japan fund racked up a six-month NAV loss of 11 per cent over the six months to 25 April. One fund that fared much better is Pacific Assets Trust (PAC), a Stewart Investors-run vehicle with a focus on stockpicking and a strong emphasis on sustainability. The trust backs companies that are "positioned to benefit from, and contribute to, the sustainable development of the economies in which they operate. Investment decisions are based on identifying companies that manage risks and opportunities and contribute towards global human development without exceeding their ecological footprint".
As we discussed late last year, the investment team is also keen not to take excessive risks with investor capital, something that explains the fund's very light exposure to China. That has helped it duck recent volatility there, and the trust's NAV is down just 4 per cent over the six months to 25 April. Yet it recently sat on a share price discount of around 10 per cent, notably wider than its 12-month average of 7.4.
To stick with a similar theme, Utilico Emerging Markets (UEM) has seen its NAV jump by 8 per cent over this six-month period, with its shares nevertheless at a discount of 12 per cent versus the value of underlying assets on 25 April, slightly wider than the 10.8 per cent 12-month average. However, this should come with a health warning, as recent gains are probably linked to the trust's big allocations to the likes of Brazil. Investors here are heavily exposed to Latin America and a potential pullback in valuations when it arrives.
On a separate note, BlackRock Frontiers Investment Trust (BRFI) traded on a wider than normal discount despite some healthy returns in the past half-year. As we detailed in last week's feature on frontier markets, the fund has some chunky allocations to Saudi Arabia and Indonesia.
Local bargains?
Looking closer to home, several names recently sat at discounts wider than their 12-month averages despite producing reasonable NAV returns, although in many cases the bargains on offer look relatively limited in scope.
While not miles away from their averages in absolute terms, a few UK equity income trusts look cheaper than they once were. Take Diverse Income Trust (DIVI), which traded on a 1.5 per cent discount to NAV on 25 April versus an average premium of 0.6 per cent. As its name suggests, the trust looks for a spread of different exposures, making it less reliant on a handful of large-cap dividend payers than many of its rivals have tended to be. The fund had around a fifth of its assets in FTSE 100 stocks at the end of February, with an allocation of nearly 40 per cent to FTSE Aim companies and around 15 per cent in each of the FTSE Small Cap and the mid-cap FTSE 250. This approach might seem unfashionable at a time when FTSE 100 dividends have surged, but does offer some diversification if commodities and financials, two of the big payers, run into trouble.
Some of its peers have also seen valuations lag their underlying portfolios. Troy Income & Growth Trust (TIGT) traded on a modest 2.1 per cent discount, which nevertheless outstripped its 12-month average at the time. Like Diverse Income Trust it stands out in a sector that can often focus on cyclical and higher-yielding stocks. Troy Income & Growth Trust's investment team run a lower-yielding but defensive portfolio that can offer dividend growth over time.
Another name that's been trading at a bigger discount than normal, Schroder Income Growth Fund (SCF), has a more conventional UK income approach, with big positions in the pharma and energy majors. Its shares recently traded on a dividend yield of 4.6 per cent.
Elsewhere in the UK, small and mid-cap vehicles have tended to sit on big discounts relative to their 12-month track record, although this might seem self-explanatory given some poor NAV returns amid the market rotation. One name that has held up reasonably well but seen its discount at a wider level than the average is Downing Strategic Micro-Cap Investment Trust (DSM), which has fared much better than previous top performer River & Mercantile UK Micro Cap Investment Company (RMMC).
