Investment trust shares can trade either at a discount or a premium to their underlying assets or net asset value (NAV), depending on factors such as current market appetite for the strategy or the performance track record of the manager.

While share prices that trade at a discount to NAV are quite common for closed-ended funds, sometimes these discounts become unduly wide or narrow and do not adequately reflect the short-term risks to performance or opportunities to make gains.

Within the Association of Investment Companies’ (AIC) UK Smaller Companies sector, which is facing into myriad uncertainties following the vote for Brexit, there are presently some superb managers and trusts that investors can pick up on double-digit discounts.

Heavily discounted trusts

Those trading on the deepest discounts include the SVM UK Emerging Fund (SVM) at 25.5%, Gresham House Strategic (GHS:AIM) on a 21.4% discount and JPMorgan Smaller Companies (JMI) on 19.7%.

Gresham House Strategic is an interesting case in point. Focused on smaller firms, it takes large concentrated bets on stocks, owning stakes in companies ranging from Be Heard (BHRD:AIM) and Tax Systems (TAX:AIM) to Northbridge Industrial Services (NBI:AIM), but with IMImobile (IMO:AIM) speaking for 34.5% of portfolio NAV.

The trust’s sharp discount assumes 1.1m shares in IMImobile will be sold to two other Gresham House vehicles at 193.5p per share as part of a rebalancing exercise, expected to happen by the end of 2017. The discount should be eroded once IMImobile becomes less dominant in the portfolio.

JPMorgan Smaller Companies’ rating looks unduly harsh, given managers Georgina Brittain and Katen Patel have proven pedigree in picking small cap winners, among them flooring industry consolidator Victoria (VCP:AIM), premium mixers phenomenon Fevertree Drinks (FEVR:AIM) and brick maker Forterra (FORT).

Also unloved is Montanaro UK Smaller Companies Trust (MTU), languishing on a 20.5% discount. With a bottom-up, quality focus, the trust’s portfolio positions include promotional merchandise supplier 4Imprint (FOUR), asset manager Rathbone Brothers (RAT) and pork-to-poultry products supplier Cranswick (CWK).

Montanaro Asset Management’s Tom Norman-Butler says there are two main reasons why the trust trades at a discount. The first is that UK small cap trusts in general are out of favour. The second is the ‘mid-term’ performance hasn’t lived up to the long-term track record.

‘This is why in June 2016 – the day after Brexit to be precise – Charles Montanaro returned to the helm as manager of the trust. Since then, the portfolio has been refreshed, the management fee reduced to 0.5% per annum and additional cost savings made such that trust is now one of the most competitively priced in the sector,’ Norman-Butler says.

‘More importantly, we are truly excited about the prospects of the companies held in the trust. If investors look under the bonnet, we feel that they will share our enthusiasm which should help bring the discount in.’

Investors can also bag trusts with superior 10-year share price total return records, according to AIC /Morningstar data, on discounts too. These include Harry Nimmo’s Standard Life UK Smaller Companies (SLS), which has an excellent long-term track record and swaps hands for a 5.1% discount to NAV; downside risk is limited by the board’s commitment to buy back shares to maintain the discount at narrower than 8%.

The others are the Mike Prentis-steered BlackRock Smaller Companies (BRSC), Henderson Smaller Companies (HSL) and Invesco Perpetual UK Smaller Companies (IPU).

Trading at a modest 2.5% discount is Miton UK Microcap Trust (MINI), the Gervais Williams and Martin Turner-managed portfolio focused on identifying companies driving productivity improvements. Names that presently pass muster with the duo include app distribution platform Crossrider (CROS:AIM), telecoms billing and customer relationship management software play Cerillion (CER:AIM) and the gift packaging products manufacturer IG Design (IGR:AIM).

Priced at a premium

Shares is an admirer of Philip Rodrigs, the manager of River & Mercantile UK Micro Cap (RMMC), one of a trio swapping hands for a premium. Net asset value continues to grow rapidly. Drivers of performance including robotic automation process technology designer Blue Prism (PRSM:AIM) and mobile advertising platform Taptica (TAP:AIM).

A curious case is Downing Strategic Micro-Cap (DSM), trading at a 5.5% premium despite being launched as recently as May and the fact two debut holdings have materially disappointed. In its maiden portfolio update (8 Aug), the board announced the trust was 32.21% invested through acquisitions of holdings in five companies; these holdings reflect the investment philosophy and objectives of the trust, which takes strategic stakes of over 3% and engages with management teams to drive longer-term value.

These positions include AdEPT Telecom (ADT:AIM), a telecommunications provider with strong cash flows, ‘good, sticky revenues’ and a CEO, Ian Fishwick, with acquisitive nous who has earned the trust of fund manager Judith MacKenzie. Another is Redhall (RHL:AIM), a manufacturer of high integrity products and solutions for the nuclear, defence, decommissioning and oil and gas industries, which recently issued (4 Oct) a profit warning blamed on project delays.

Cake decorating, food ingredients and premium bakery business Real Good Food (RGD:AIM) is another Downing investment that hasn’t paid off, yet, having issued damaging profit warnings and seen substantial management changes due to poor corporate governance and controls. These issues are now being addressed by new management.

‘We suspected there were undisclosed related party transactions,’ explains MacKenzie, who took a board seat in June when Downing invested (subscribing for new shares and providing a secured loan).

MacKenzie confesses ‘we underestimated the challenge of the corporate governance that we needed to address, but we got involved and made changes pretty quickly.’ MacKenzie still believes Real Good Food is ‘a bit of a hidden gem’ and remains confident in the fundamentals of the business. (JC)

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