As global stock markets roar to all-time highs investors face an increasingly tricky hunt for value. One of the most popular ways to identify value within the investment trust space is to look at the discount to net asset value or NAV per share.

In other words, how much lower is a trust’s share price trading than the NAV attributable to each individual share.

As Shares has explained in the past (see Understanding premiums and discounts to NAV, 13 October 2016), just because an investment trust trades at a discount to NAV doesn’t mean it is automatically an attractive investment.

Even so, this can still be a sensible place to start your research. The trouble is, discount opportunities have dried up significantly this year. That’s because average discounts have narrowed substantially.

Discounts have been narrowed

As of 31 October, the average investment trust discount to NAV (excluding private equity, hedge funds and property) stood at 4.9%, according to data from market maker Winterflood. That’s a two-year low and represents a decline of more than 25% from 2017 peaks            of 6.6%.

‘The market cap weighted average discount for the global sub-sector has narrowed from 6.5% to 2.2% during the past 12 months,’ Winterflood says in its latest investment companies report. That partly reflects strong demand for overseas equities from UK-based investors, where domestic GDP growth and Brexit issues continue to cause concern.

Illustrating the point further, the FTSE Equity Investment Instruments index is up around 15% so far in 2017, far outstripping both the FTSE 100 (up 4.9%) and the FTSE All Share (6.3% ahead).

Left-field analysis

One investment research house has gone beyond simple NAV discounts in its search for investment trust value, filtering the market for what it calls ‘double discount’ opportunities.

This is where investment trusts are themselves trading at a discount to their NAV, but where their underlying holdings, often other trusts as well as individual companies, are also trading at a discount to NAV. Analysts at Liberum Capital are behind this trust selection process.

The idea is, presuming NAV discounts continue to narrow, the share prices of the portfolio constituents of a potential ‘double discount’ trust will close the gap to their net assets at the same time as the trust itself.

‘We believe this could present a value opportunity and re-rating potential,’ says Liberum.

Five with upside potential

The selection process, which included funds with a minimum 50% portfolio weighting to assets with an identifiable discount, has thrown up five investment trusts which could potentially enjoy further share price upside.

‘A number of the funds have potential near-term catalysts including continuation votes and realisation opportunities,’ says Liberum. ‘Many of these have been introduced in an effort to improve share ratings.’ (SF)

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