A mere 10% of the main investment trust sectors are trading below their average discount or premium to net asset value (NAV) over the past year. That implies it is becoming harder to find bargains, albeit not impossible.

We’ve calculated the 10% statistic by looking at data from financial services group Winterflood.

On a sector basis, the ones still trading below their 12-month average discount or premium to NAV are UK equity and bond income (smaller companies), UK mid cap, US smaller companies and Asia Pacific income.

Why this is important news

This reduced opportunity pool is important as investors have historically flocked to investment trusts as a way of buying assets below their true value.

You can easily spot bargains by comparing their share price to their net asset value (NAV); the latter figure will be regularly reported via stock market announcements.

Some investment trusts consistently trade at a discount to NAV for specific reasons like the market questioning the true value of their underlying assets. Occasionally you’ll get some trusts trading at a premium if their assets or strategy is in hot demand.

Discounts keep narrowing

In March, Stifel found average discounts in the investment trust sector were running close to their narrowest level for 15 years – and it is clear from the latest data that this trend remains intact.

Stifel found average discounts had narrowed to 5.1%. In the run up to the EU referendum vote in June last year, the average investment trust sector discount stood at 11%, providing a significant value opportunity for investors. The subsequent recovery in equities has closed that gap.

The average discount on the ‘global’ investment trust sector is now 7%, according to Winterflood data, versus a 7.3% average over the past 12 months to 19 May 2017.

On a weighted basis, which attributes greater influence to the largest trusts, the current global segment discount is 4.3% versus a 12-month average of 6.5%.

Investment trust heavyweights Alliance Trust (ATST), Foreign & Colonial (FRCL) and Monks (MNKS) are all currently trading at narrower discounts to their 12-month average.

Spotting cheaper than normal trusts

With the tightening of discounts in mind, we’ve subsequently analysed data from Winterflood which reveals investment trusts trading at a greater discount to NAV than their average level over the past year. This is one way of spotting value opportunities, as long as you are confident the widening of the discount will only be a short term issue.

Anyone looking to take advantage of wide discounts should always research the investment trust to see if is cheap for a negative reason.

For example, debt fund  Ranger Direct Lending (DLF) is trading on a 27.9% discount to NAV compared with a 12-month average of 9.7%.

Ranger has been dragged down by having a large investment in the Princeton Alternative Income fund. The latter has been hit by having provided credit to two companies which have subsequently got into serious financial trouble.

Sectors and managers in the spotlight

Low valuations in the biotech sphere are capping progress at Biotech Growth Trust (BIOGs), and the biotech sector has underperformed the wider market.

Stifel pointed out in mid-May that the Nasdaq Biotechnology Index has lagged the wider market, rising by 16% versus the 20%-odd gains of the S&P 500. It is still positive on the prospects for Biotech Growth Trust.

Changing the investment manager can also become a big problem, as Strategic Equity Capital (SEC) is finding out post the shock departure of Stuart Widdowson from GVQ Investment Management, which runs the investment trust.

As the public face of SEC since May 2014, Widdowson’s tenure saw a rough 45% rise in NAV during his three years in charge.

The jury is still out on whether his replacement, Jeff Harris, can achieve similar results. That’s illustrated by the investment trust trading at a 13.9% discount to NAV versus a 9.5% average over the past year. (SF)

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