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Investment trust discounts widen: Where can you go bargain hunting?

Paloma Kubiak
Written By:
Paloma Kubiak

Nearly all investment trust sectors are trading at a discount, with the average discount breaching 14%, according to the Association of Investment Companies (AIC).

Out of 38 sectors, just one is trading at a premium of 3.8%. Hedge Funds is one of the year’s best-performing, with the AIC noting that several constituents “have delivered for investors in turbulent times”.

Meanwhile the 37 investment company sectors trading at a discount have seen the discount widen more than 10 percentage points. This is up from 3.6% on 31 December 2021, to 14.3% on 18 November 2022.

The sector with the deepest discount is North America (26.5%), followed by India (14.9%) and Global Emerging Markets (12.4%).

However, the AIC warned that discounts for alternatives sectors “can be misleading” as they’re based on current share prices and not the most recently reported net asset values “which can be out of date”.

However, it lists Growth Capital on a 43.4% discount, followed by Property – Europe on 42.8%.

Elsewhere, within the equity sectors, the biggest discount changes in 2022 have been in the Biotechnology & Healthcare and Technology & Media sectors, where discounts have widened by 9.2 and 8.5 percentage points respectively.

‘Buying opportunities’

Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), said: “Discounts are currently wider than usual and this can present buying opportunities.

“However, investors need to consider whether an investment company’s strategy meets their objectives. They also need to take into account other factors such as the investment company’s performance record, charges and gearing. If investors are in any doubt, they should speak to a financial adviser.”

Laith Khalaf, head of investment analysis at AJ Bell, said the fact that almost all investment trust sectors are trading at a discount, and that discounts have widened so much this year, “is a sign of poor market sentiment and risk aversion amongst investors”.

Khalaf said: “The global economy is tilting downwards, geopolitical risks are high, and a tectonic shift in monetary policy is undermining confidence in asset valuations, so it’s entirely understandable that investors might be assuming a startled tortoise pose.

“However, at times of deep uncertainty like this, contrarian investors might be thinking about going bargain hunting. It’s often rewarding in markets to be greedy when others are fearful, though given the current fears stalking the market with unpredictable political, economic and monetary dimensions, it’s probably a good idea to hedge your bets by drip-feeding money into the market gradually, perhaps through a regular savings plan.”

He added that it’s important to recognise that simply because an investment trust is trading at a discount, it may not be a screaming bargain.

“A trust may habitually trade below its net asset value, so investors should compare the current discount to a historical average, to get an idea of how cheap the trust really is. Indeed, it’s notable some trust sectors have actually seen their discount narrow over the course of this year, which means they aren’t as attractively priced as they were.

“The sector averages themselves are also only an indication of value, because there can be a wide dispersion of discounts within each sector and even some trusts trading on a premium. For instance, the North America sector carries an average discount of -26.5% according to the AIC, but discounts within this sector range from JP Morgan American on a discount of -2.2%, through to Pershing Square Holdings on a discount of -32.8% (source: Morningstar). So investors looking for bargains need to go out with a line and pole rather than a trawling net,” he said.

Investment trusts to consider

Khalaf lists Abrdn UK Smaller Companies Growth Trust which benefits from a clear investment process and a well-resourced small cap team, “built under the leadership of Harry Nimmo who is soon to retire”.

“The trust looks for companies with strong growth characteristics and robust balance sheets. It’s a fairly concentrated portfolio of around 60 stocks and being invested in smaller companies does mean it comes with higher risk attached. The trust currently trades on a discount of -10.7%, in line with its 12-month average.

Alternatively, the Bankers Investment Trust invests across the globe, leveraging the expertise of regional teams within Janus Henderson and focusing on a rising dividend as well as capital growth. “Indeed, the trust has racked up 55 years of consecutive dividend increases and currently offers a yield of 2%. The trust is currently trading on a discount of -7.1%, compared to a 12 month average of -5.4%.”

He also listed Fidelity Special Values, run by Alex Wright who is a contrarian investor, “looking for unloved or overlooked companies in the UK stock market that he thinks are set to stage a recovery”.

“This can be a higher risk approach so it isn’t for the faint-hearted, but the fund is well diversified with around 100 holdings, invested across the market cap spectrum. The trust currently trades on a discount of -5.8% compared to a 12-month average of -3.5%,” he said.

Anthony Leatham, head of investment Companies Research at Peel Hunt, said China “cannot be ignored” and he would highlight Fidelity China Special Situations trading on an 11% discount.

“A recent update from the manager – Dale Nicholls – points to some of the cheapest valuations across the underlying portfolio companies that he has seen in a long time. Investors are looking for a shift in policy focus to support growth and any positive action could act as a catalyst for a re-rating.”

Meanwhile Priyesh Parmar, associate director of investment companies research at Numis, highlighted the opportunities he sees in Vietnamese specialist investment companies in the Country Specialist sector.

He said: “The economy is performing strongly and inflation remains below the central bank’s 4% target. The reasons for the sell-off appear concentrated in an area of the market to which the listed funds have no direct exposure. Therefore, we believe this presents a strong buying opportunity.

“As Vietnam appears on the radar of more generalist investors, this should provide a positive backdrop for the country and we believe there is potential for a tighter discount on the listed funds to be more sustainable in future. Furthermore, investors have the potential future catalyst of MSCI Emerging Markets inclusion, albeit this is at least a few years away.”