How to set a “word of the year” – money edition
At the end of each year, Oxford Languages releases their ‘Word of the Year’ – either a word or...
It’s January, and today that means one of three things: being ‘dry’, being vegan, or going sales shopping.
As someone who likes the odd glass of wine and would quite frankly be an epic fail in the kitchen without eggs and milk, I chose to head off to the shops.
A couple of hours later, my wallet was slightly lighter – but fit nicely into my new handbag (70% off), which also matched my new coat (50% off). I had bagged myself some bargains.
When it comes to investments, there is one area that also offers up a bargain from time to time: investment trusts.
In simple terms, the net asset value (NAV) of an investment trust is the per-share value of the portfolio. It is calculated by dividing the total value of all the investments in the portfolio, less any liabilities, by the total number of shares in issuance.
But because shares in an investment trust are traded on the stock market, the price of the shares is based on what investors think the investment trust is worth, rather than the actual value of the assets it holds.
So a trust can be undervalued or overvalued compared to its NAV – in other words it can be on a premium (more expensive than usual) or on a discount (cheaper than usual).
At first glance, investing in a trust on a discount may seem like a no-brainer. With a discount of 10%, for example, investors could pick up £1 worth of assets for 90p.
But there are many reasons a trust may be trading on a discount and in some cases the discount may be a warning sign. So understanding why a trust is trading at a discount is crucial to evaluating whether or not to invest
Check whether the trust’s discount is bigger or smaller than its three-year average. If it’s significantly bigger it could be an opportunity. If it’s been on the same discount for a long time, you can ‘discount the discount.
Then look to see if the trust has a bigger discount than its peer group. If it is a lot bigger it could be a warning sign that something is up. At this point you could read the last annual or semi-annual report to see what the manager and board have to say.
If the trust and its manager are usually good and just out of favour or going through a bad patch, it may still be an opportunity. If there are more fundamental causes for concern, it is perhaps one to leave on the shelf.
And, at the end of the day, the most important consideration is: do you really need this trust in your investment ‘wardrobe’? Is the underlying case for the asset class, sector or geography strong, and will it help you reach your investment goals?
Below we take a closer look at five Elite Rated and Radar investment trusts currently trading on a discount*:
Three year average: -6% to +2.5%
Sector average: -3.8%
Having recently celebrated its 130th anniversary, this trust is one of the oldest in existence. Managed by Peter Ewins since August 2005, it invests in smaller companies from around the world. BMO Global Asset Management’s small cap specialists have a well-disciplined investment process and the trust has a strong track record of beating the market. It has also produced 49 years’ worth of dividend growth for investors.
Three year average: -4% to +14.5%
Sector average: -2.7%
Shin Nippon means ‘new Japan’ and this trust focuses on smaller Japanese companies, and emerging or disrupted sectors, where manager Praveen Kumar sees innovative growth opportunities. The team are prepared to bide their time while these companies reach their full potential and, while the trust can be highly volatile, patient investors have been richly rewarded in the past.
Three year average: -7% to +3%
Sector average: -7.2%
Managed by Alexander Darwall since its launch in November 2000, European Opportunities Trust invests in medium and larger companies based on the Continent. Alexander has developed a consistent investment process that has a record of success in different economic environments. The trust was renamed in November 2019 following Alexander’s decision to leave Jupiter and set up his own asset management business.
Three year average: -15% to -6%
Sector average: -9.6%
This trust offers investors direct exposure to the China growth story. The manager, Dale Nicholls, can also invest in Chinese companies listed on other exchanges around the world, as well as companies with significant interests and primary revenue exposures in China. Up to 10% of the portfolio can also be invested in unlisted companies with a view to an Initial Public Offering (IPO).
Three year average: -10% to +3%
Sector average: 2.7%
This is a unique trust investing in healthcare stocks from around the globe. These companies will predominantly come from four sub-sectors: pharmaceuticals, biotechnology, medical technology and healthcare services.
The portfolio is split into two segments: growth and innovation with a 90/10 split. The growth element is made up of predominantly larger companies, whereas the innovation pot will invest into medium and smaller companies that have the potential for greater growth in the long run.
*Source: The Association of Investment Companies, all data as at 27 December 2019