ENTIRE SECTORS CAN SHINE, OR BE SHUNNED

An investment trust peer-wide discount might simply be saying that the sector is cyclically out of favour and, with time, might come back into favour, or it could equally be a signal that the stock market has a view that a particular asset class is about to fall in value.

‘The classic case study is the property peer group, where in 2022 discounts widened before property values fell,’ says Kepler’s Ray. The stock market correctly anticipated this because interest rates had risen, and this usually has a direct effect on property values.

‘Betting against this type of discount in the early stages could be risky, but sometimes moves like this can go too far and create opportunities if you are patient,’ says the Kepler analyst. ‘Equally, renewable energy trusts fell to discounts in 2022 as investors worried about potential windfall taxes that would, perhaps ironically, impact renewable energy generators.’

Premier Miton’s Nick Greenwood, who runs the MIGO Opportunities Trust (MIGO), says this can happen from a geographic point of view too. He says that investors have been turned off places like Vietnam, for example, because of China’s previous economic slowdown and ongoing political risk.

Discounts across the UK Equity Income sector

He says that the global economy is locked into China but security concerns in the West create a terrific opportunity for Vietnam. Greenwood believes it is an obvious place for US and European multinationals companies to do business and manufacture in the region while avoiding the political minefield of China itself.

Winterflood’s Bird also argues that it is wise to find out whether a trust has a discount control policy or if the board has previously tended to repurchase shares to limit the discount. ‘This can help limit downside discount risk, while maintaining exposure to any potential re-rating from a change in sentiment towards the fund.’