DON’T HANG AROUND

5 investment trusts that won’t stay this cheap for long

UKinvestment trusts are trading at the widest discount seen since the 2007/8 financial crisis, according to recent research from Numis and Winterflood. Against a backdrop of weak investor sentiment, the sector weighted average discount widened from 2.3% at the start of 2022 to 16.4% by the end of March 2023.

For example, the Global sector is currently trading on a 9.27% discount to NAV versus a five-year 2.87% average, according to data from the AIC (Association of Investment Trusts). It is worth highlighting this investment trust sector because it houses some hugely popular trust names, such as Brunner Investment Trust (BUT), Scottish Mortgage Investment Trust (SMT), Monks Investment Trust (MNKS), Alliance Trust (ATST) and Lindsell Train Investment Trust (LTI). For a brief recap, when we talk about a discount, we are describing the gap between the share price of an investment trusts versus its NAV, or net asset value. In other words, the value of the underlying assets in the trust’s portfolio.

‘Discounts are, at a fundamental level, a consequence of fewer buyers than sellers,’ says Alan Ray, an investment trust research analyst at Kepler Trust Intelligence. ‘If you think of share prices as a popularity contest, then a discount (or premium) is the “clearing price” at which buyers are willing to step in.’

There is an inevitability that discounts will widen during times of economic and market uncertainty as capital dries up, but such a steep level of discount should not last long. This suggests value can be found in this well-established and diverse part of the UK investment industry.

‘In our view, this has created some notable value opportunities, especially amongst sectors

Discounts across the Global sector

that have been hit particularly hard by the rising interest rate environment, including private equity, infrastructure and property, as well more growthfocused equity funds,’ says Emma Bird, head of investment trusts research at Winterflood.

Due diligence is, as always, vital, and investors should do their research before committing to an investment. To provide readers with a manageable starting list, Shares has scoured the data and produced five investment trusts that are trading below their five-year averages and where, we believe, this valuation gap could narrow over the months ahead.

What To Consider When Thinking About Discounts

When assessing whether a certain discount is likely to offer an attractive entry point, a key datapoint to look at is the investment trust’s current rating relative to its history. ‘A current discount considerably wider than the medium to long-term average could suggest that over time the shares will mean revert and experience a positive rerating,’ says Bird of Winterflood.

But simply looking at a trust’s discount today compared to, say, its five-year average is, on its own, a vanilla analysis on par with judging a company share’s price to earnings versus its historical average. The world turns and things change, and the prospects for an investment trust can become brighter, or gloomier, as time passes.

Investors need to dig deeper. ‘Have there been fundamental changes to the trust’s management or investment approach that could impact future prospects that may mean that the discount remains at a wider level,’ says Bird of Winterflood.

She suggests that an easy next step would be to compare a trust’s prospects and discount with its peers. ‘If an investment trust is trading at a notably wider discount than its peers for no discernible reason, and if this has not consistently been the case historically, this can indicate an attractive entry point,’ the Winterflood investment head says.

A persistent discount could be a bigger problem, indicating a general lack of investor interest in the investment trust and its proposition. If a single discount sticks out in a peer group for years, it could be a sign of more structural lack of demand. ‘Is there something idiosyncratic about the investment mandate that puts investors off, or a structural reason? It is a good idea to look at report and accounts in instances like this,’