With huge uncertainty over President Donald Trump’s tariffs and the likelihood of a global trade war, there are real questions on whether the tried-and-tested strategy of ‘buying the dip’ still applies – not to mention the difficulty of working out where the dip even is.
But if the short-term outlook appears fraught, investors with long-term horizons have a chance to bargain hunt, considering that the MSCI World fell 10.5 per cent in sterling terms in the month to 22 April.
Investment trust discounts as a whole have not widened, at least as things stand: the sector, excluding 3i Group (III), was trading at an average discount of 15 per cent as at 16 April, roughly in line with where it was at the beginning of the month.
However, certain sectors and individual trusts look interesting – keeping in mind that trust share prices and discounts, like everything else, have proved volatile over the past three weeks.
The chart below lists the trusts that are trading on discounts wider than their 12-month average, according to Z-scores. Negative Z-scores are not an automatic buy signal, but investors who are already looking at some of these trusts might find them a useful indicator of good entry points.
Private equity trusts dominate the list, and not without reason. The outlook for private equity has worsened, with Stifel analysts arguing that market volatility is likely to put dealmaking and exits on hold.
Valuations could also be impacted later in the year if listed markets continue to do poorly. “As a rule of thumb, valuations tend to be relatively stable if the market correction is minus 10 percentage points or less, as earnings growth offsets lower multiples,” Stifel analysts Iain Scouller and William Crighton said. If it is worse than that, net asset values (NAVs) could conceivably fall.
However, discounts are very wide across the private equity sector. “We continue to believe the sector is already pricing in a gloomy environment and offers value for investors prepared to wait and see realisations pick up,” they added.
Options include Patria Private Equity (PPET) and Oakley Capital (OCI), both of which have outstanding long-term track records and focus more on European than US companies.
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Global trusts and others
Mick Gilligan, head of managed portfolios at Killik & Co, pointed to North Atlantic Smaller Companies (NAS) and RIT Capital Partners (RCP) as investment trusts with good portfolios that are looking cheap.
The first was trading at a 34 per cent discount to NAV as at 23 April. It is managed by Chris Mills, who is also the biggest shareholder (he holds about £150mn, against the trust’s market cap of £469mn). The portfolio is a combination of quoted and unquoted smaller companies that tend to operate in niche markets and have low levels of debt.
These characteristics should protect them if economic conditions get tougher from here, Gilligan argued. “The discount reflects several concerns – smaller company performance during an economic downturn, the unquoted holdings that might see valuations revised downward and the key-man risk with Mills,” he said. “However, I think these concerns are outweighed by a portfolio that has a lot of self-help levers, low levels of debt and a below-average level of economic sensitivity.”
RIT Capital is often grouped with wealth preservation trusts, but has a bigger focus on growth compared with the likes of Ruffer Investment Company (RICA).
Due to its exposure to private companies, and past issues with disclosure and costs, it has been trading at a significant discount for some time (-30.8 per cent as at 23 April). As recently reported, the trust appears to be turning the ship around and could be an option at times of market uncertainty.
Global equity trusts are not looking especially cheap discount-wise, but for investors looking for below-benchmark exposure to the US away from the Magnificent Seven tech giants, there are some viable options. Stifel analysts like Murray International (MYI) for income. Its defensive approach has underperformed in the past couple of years but held up better than most in the recent sell-off.
Meanwhile, Brunner (BUT) is a more growth-focused trust that has held up better than its peers, with its NAV down by just 5.5 per cent in the month to 16 April. The trust has limited exposure to the Magnificent Seven, with only Microsoft and Alphabet among its top 20 stocks and an exposure of just 44 per cent to North America.
Finally, some investors will want to try to buy tech when it’s down – a bold call, but after all the long-term case for artificial intelligence (AI) remains. “Both Allianz Technology (ATT) and Polar Capital Technology (PCT) offer good options for those wanting to try to catch the falling knife – particularly Polar Cap Tech for those looking for exposure to the AI theme specifically,” the Stifel analysts said. “However, with market concentration waning, now is the time for the managers to prove their worth and demonstrate alpha.”