Anyone with a long-term investment horizon should take a good look at the investment trust sector as the latest market sell-off has created plenty of opportunities.

We’ve spotted numerous investment trusts trading on a wider discount to net asset value than their average over the past 12 months. There are also examples of investment trusts trading on lower than average premiums to net asset value.

As a word of caution, trading below average discount or premium levels doesn’t necessarily make every single investment trust a solid ‘buy’. You still need to research the portfolio and be comfortable with the trust’s investment process, skills and ability to generate value for shareholders.

Share prices are also constantly changing. The data for this article was correct as of 12 February, compiled by financial services group Winterflood, yet the discounts and premiums could have changed by the time you read this article.

WHY DO TRUSTS TRADE ABOVE OR BELOW NET ASSET VALUE?

Investment trusts can trade at a discount or premium to net asset value for many different reasons. Discounts often accompany trusts that invest in more illiquid assets such as small cap stocks or private equity assets where it is difficult to get an up-to-date valuation for private companies.

Premiums are common with investment trusts that have ‘in vogue’ assets like infrastructure.

They can also happen with trusts run by successful fund managers. Investors are often happy to pay more than the value of the underlying assets, also accounting for cash and debt, in order to benefit from certain fund managers’ skills – in the hope they will make them rich in the future.

WHICH TRUSTS STAND OUT AFTER THE SELL-OFF?

Global equities-focused Alliance Trust (ATST) at 705p trades on a 5.8% discount to net asset value which is slightly bigger than its 5.2% average discount over the past 12 months.

Its biggest holdings are Google’s parent company Alphabet and telecoms conglomerate Comcast. The portfolio has a heavy weighting towards North America at 44.9%, according to the latest factsheet.

A more pronounced movement away from the 12-month average has been seen with Caledonia Investment Trust (CLDN). Trading at £27.20, its discount to net asset value now stands at 17.1% versus a 15.9% average.

Caledonia’s portfolio includes a mixture of unquoted companies, quoted stocks and investments in third party funds. For example, its biggest holding is a stake in Seven Investment Management, a privately-owned asset management business.

It also has investments in unquoted leisure group Gala Bingo and a stake in care home provider Choice Care (also unquoted). Investments in companies trading on a stock market include soft drinks provider AG Barr (BAG), tech firm Microsoft and helicopter services group Bristow. Fund investments include Macquarie Asia New Stars.

LOSING A PREMIUM COMPLETELY

Also among the field of global investment trusts, Martin Currie Global Portfolio (MNP)
is now trading on a 2% discount to net asset value; over the past 12 months it has traded at par value on average.

It is among the large number of investment trusts which have a discount control mechanism, buying back shares when they trade at a discount – in order to ensure the share price trades at, or around, net asset value.

Personal Assets Trust (PNL) has on average over the last 12 months traded at a 1.2% premium to net asset value. It is now trading on a 1.4% discount.

Its investment policy is to protect and increase (in that order) the value of shareholders’ funds per share over the long term.

The portfolio contains a mixture of UK, US, Canadian
and European-listed stocks, as well as gold, cash and index-linked bonds.

LINDSELL TRAIN’S ‘BARGAIN’ VALUATION

Lindsell Train Investment Trust (LTI) is no stranger to trading at a premium to net asset value – in fact it’s often trading on the biggest premium of any investment trust. The average premium over the last 12 months was 25.5%. We can recall the shares trading in recent years at a premium in excess of 60%.

It is now trading on a ‘mere’ 20% premium. Long-term fans of the trust may view that as an opportunity to buy more stock given the premium is much lower than in recent memory.

Why do they trade at a premium? Some investors argue the premium is justified in the belief that the investment trust’s 24.31% stake in the Lindsell Train Limited fund management business is undervalued, saying it should be valued on a multiple of earnings and not net asset value. Fund manager Nick Train is also considered to be very good at his job.

MIXED FORTUNES FOR SMALL CAPS AND JAPANESE FUNDS

Funds investing in small caps and Japanese stocks stand out from the crowd in terms of trading on wider discounts or lower premiums to net asset value than normal.

For example, F&C Global Smaller Companies (FCS) trades on a 2.5% discount, yet over the last 12 months it has traded on an average 1.3% premium to net asset value.

North Atlantic Smaller Companies (NAS) trades on a 21.8% discount versus a 12-month average discount of 17.7%. Jupiter US Smaller Companies (JUSC) has seen its discount more than double from its 12-month average of 1.7%; now standing at a 3.5% discount.

The 9% drop in Japan’s benchmark index, the Nikkei, since the start of February illustrates how the Japanese equity market has been badly hit by the global market sell-off.

Relevant investment trusts caught up in the storm include JPMorgan Japan Smaller Companies (JPS), whose discount now stands at 12.6% against an average of 11.5%.

However, we note that some Japanese trusts are actually trading on higher premiums or lower discounts than the past 12-month average.

For example, Baillie Gifford Shin Nippon (BGS) is trading on a 9.1% premium (average: 5.9%); and JPMorgan Japanese (JFJ) is trading on an 8.6% discount (average: 10.5%). (DC)

‹ Previous2018-02-15Next ›