Going cheap: investment trusts trading on wider than normal discounts Mid and small cap trusts are among the parts of the market offering bargains
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his year’s market turmoil has caused many investment trusts to trade below their average discount to net asset value. It means investors can often buy £1 worth of assets for 90p or thereabouts. A popular trading strategy is to find investment trusts on wider than normal discounts and buy them in the hope the discount narrows. The trick is to understand which trusts have become cheaper due to a one-off factor or whether something has shifted in the market which could keep them cheaper for longer. MID CAP MAHEM UK mid-caps fell out of favour with investors earlier this year on fears that inflation and a potential recession would hurt earnings for companies, particularly consumer-facing ones. The FTSE 250 index of mid cap stocks has fallen by 18% in value year-to-date, significantly underperforming the FTSE 100 index of largecap stocks which have been propped up by lots of companies that benefit from higher inflation including oil producers. Mercantile (MRC) and Schroder UK Mid Cap (SCP) fish for opportunities in the FTSE 250 index. Both have seen the discount to the value of their underlying assets widen to 15.5% from a 12-month average of 12.5% and 11.1% respectively,
according to data from Winterflood. So much potential bad news is now priced into mid cap stocks and we saw earlier in July that it doesn’t take much good news to prompt a big share price recovery. For example, Frasers (FRAS) soared by more than 20% on 21 July after saying everything was going well with its sports retailing business. Mercantile’s portfolio includes stocks such as Watches of Switzerland (WOS) and Dunelm (DNLM), both of whom have recently issued positive news. The Schroder trust also invests in Dunelm as well as Telecom Plus (TEP) which in June 2022 reported record results. SMALL CAP PAIN Smaller company investment trusts have also seen wider discounts to net asset value, both in the UK and elsewhere in the world. For example, Montanaro UK Smaller Companies’ (MTU) discount has doubled to 10% from a 12-month average of 5.1%. Abrdn Smaller Companies Income (ASCI) is now trading 21.2% below the value of its underlying assets versus a 14.5% one-year average discount.
Montanaro UK Smaller Companies Net asset value (p)
Share price (p)
200 150 100 50 0 2020
2021
2022
Chart: Shares magazine • Source: Refinitiv
28 July 2022 | SHARES |
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