Investing in a UK recovery
Hugh Sergeant, manager of the ES R&M UK Recovery fund, talks to Darius McDermott about value...
“Covid-19 has created a once-in-decade opportunity to pick-up exceptional investment trusts at bargain levels.” That’s the view of Vincent Ropers, co-manager of the TB Wise Multi-Asset Growth fund.
“The pandemic’s meteoric impact on economic and market sentiment has caused a number of trust discounts to dramatically widen,” he said. “With many trusts now trading far below their net asset value, investors can access attractive entry points in the event of a re-rating.”
Because the shares of investment trusts 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 ‘net asset value’ – in other words it can be trading on a premium (more expensive than usual) or on a discount (cheaper than usual).
When a trust is on a discount, the hope it that this discount will narrow and maybe even move to a premium. This is called a ‘re-rating’. In that scenario, even if the net asset value has not changed, an investor has still made money as they can sell the shares for a higher price than when they bought them.
So 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 it’s always important to look before you leap.
“Differentiating value from a bargain requires forensic research and a deep well of expertise in the investment trust space,” Vincent continued. “A re-rating is not inevitable, but we look to access exceptional trusts benefitting from the combination of macroeconomic and valuations tailwinds. It is our conviction that this will lead to longer-term outperformance. From under-the radar technology, to undervalued resources, we’ve identified a number of trusts we believe currently offer exceptional value.”
The trusts that Vincent has identified are AVI Global Trust (global equities), Oakley Capital Investments (a private equity trust increasingly investing in companies utilising online delivery platforms), Odyssean Investment Trust (UK smaller companies), Herald Investment Trust (global smaller companies) and Baker Steel Resources (commodities and natural resources).
Find out more about these trusts at www.theaic.co.uk
And Vincent is not alone in snapping up an investment trust bargain. Hugh Sergeant, manager of ES R&M UK Recovery, invested in Fidelity China Special Situations in the third quarter of the year, during which time it was trading at around a 5%-10% discount**. Since then the discount has closed leaving the trust at fair value**.
Hugh commented: “Our investment in Fidelity China Special Situations was based on three key attractions: exposure to a part of the world with companies that are growing fast but are reasonably valued, a manager with vast experience in the region and a track record of adding value over-and-above the benchmark, and a wider than usual discount to NAV.”
These are not the only trusts to be heavily discounted at the moment. Many UK investment companies’ shares are trading at big discounts to their net asset value too. For example, the AIC UK All Companies and UK Smaller Companies sectors are both currently priced more than 11% below their average constituent companies’ NAV, according to independent statisticians Morningstar*. This means that buyers of these trusts obtain £1 of underlying assets for every 89p they invest.
Sue Noffke, manager of newly Elite Rated Schroder Income Growth, gave us her thoughts on why the UK equity market is so unloved: “There are several near term uncertainties currently clouding the outlook for the UK equity market – the impact of both Covid-19 and Brexit are front of investors’ minds,” she said. “At the current time it remains unclear whether the UK will leave the EU without a deal or, if there is a deal, what sort will it be, with the knock on impact to the value of the pound.
“The UK equity market has traditionally afforded investors seeking income many opportunities with a high dividend yield compared to international equity markets and other asset classes but a series of high profile dividend cuts from a number of household names in the past year, as a result of both Covid and structural issues, has weighed on market sentiment and the level of income available to investors in the short term.
“It is understandable that current sentiment towards the asset class remains so poor, however these uncertainties are well known, and factored into valuations, whilst the positive long-term prospects of many areas of the market have been obscured by such gloom. As investors shy from UK equities as a whole there remain many areas of the market that are relatively unaffected by either Covid or Brexit.”
A number of Elite Rated and Radar trusts are currently trading on a discount to NAV of around 10% or more**.
Watch this video to find out more about discounts and premiums:
*Source: AIC Compass newsletter, October 2020
**Source: AIC as at 18 October 2020. Please note that the share price of investment trusts, and therefore discounts and premiums, can move significantly in a very short time frame.