- Investment trust discount climbed again in Q1 to 16 per cent
- Selling linked to cost disclosures
A recovery in the investment trust sector has faltered in the first quarter, leaving plenty of options for bargain hunters.
The lively market rally that took hold in late 2023 saw many trust shares ride high and discounts to net asset value (NAV) come in somewhat. That recovery has stalled more recently, however.
“Unfortunately the sector re-rating in the last two months of 2023 partially reversed over Q1, and the average sector [discount] widened back out from 13 per cent to 16 per cent, not too far below the 19 per cent level reached last year,” Stifel analysts said.
On a more granular level, the trends of late 2023 continued, with US equity exposure driving big gains for the likes of Manchester & London (MNL), Polar Capital Technology (PCT), Allianz Technology (ATT), JPMorgan American (JAM) and Baillie Gifford US Growth (USA). Battery storage funds and renewable energy trusts continued to suffer big share price falls.
Why discounts are widening
Bargain hunters eyeing up investment trust discounts might first wish to understand why they have widened yet again, and some are perplexed by the recent moves.
James Carthew, head of investment company research at QuotedData, said he was “increasingly struggling to rationalise” the persistence of such wide discounts, adding: “I can’t think why people would be selling investment companies now, especially on massive discounts.”
One explanation might lie in the fact that government bond yields, with which valuations on alternative asset classes have been closely correlated, have risen again this year. Some, however, believe that sector-specific issues are at play.
“That correlation seems to have broken down in the last few months, and I am pretty certain [recent widening] is linked to the cost disclosure rules as investors are selling infrastructure trusts because their own ongoing charge figures are too high [when] holding them,” said Daniel Lockyer, senior fund manager at Hawksmoor. Professional investors currently have to report investment trusts’ costs as their own, making their portfolios look more expensive, but campaigners have made the case for them to be treated differently.
If Lockyer’s theory holds water, any improvement on the cost disclosure front could see trust share prices recover somewhat. For now, investors would do well to consider which trusts look cheap for a reason and what looks mispriced.
Infrastructure trusts of different stripes look especially unpopular: the average discount on the AIC’s Renewable Energy Infrastructure sector widened by 12.7 percentage points over the first quarter, with names such as Gresham House Energy Storage (GRID), Gore Street Energy Storage (GSF), NextEnergy Solar (NESF), Octopus Renewables Infrastructure (ORIT) and Foresight Solar (FSFL) among the biggest share price fallers.
Specialists have made the case for buying into such names, even just to collect dividend payments. “You can look at the yields [in the renewables sector] and think ‘I’ll just lock those away for another 10 years’,” Carthew said. He added that there was “no logic” to names such as NextEnergy Solar and SDCL Energy Efficiency Income (SEIT) trading on double-digit share price dividend yields, given that such payouts look well covered.
Lockyer’s team, meanwhile, has been buying into HICL Infrastructure (HICL), BBGI Global Infrastructure (BBGI), International Public Partnerships (INPP) and Cordiant Digital Infrastructure (CORD) where “discounts are at their widest for a year and yields are highest”.
The usual suspects
Analysts have also reiterated conviction in funds invested in unlisted assets. Peel Hunt analysts pointed to RIT Capital Partners (RCP), one of the ‘wealth preservation’ trusts and a name known for a decent allocation to private assets, arguing that its current discount “reflects the past and fails to recognise the potential rebound in fortunes as private equity valuations are brought up to date”.
The team also pointed to Chrysalis Investments (CHRY), which trades on a discount of around 40 per cent but has updated its investment management arrangements, survived a continuation vote and could see another “catalyst” for one of its bigger holdings such as IPO candidate Klarna.
It’s worth noting that some investment trust bargains may have slipped through investors’ fingers, with the discount on Scottish Mortgage (SMT) shares narrowing notably in recent weeks, and at points getting to around 4 per cent. “We were buyers last year but the current rating expects a lot from NAV performance. We still have a holding in SMT but I’d rather look elsewhere for ideas to commit fresh capital to,” said Mick Gilligan, head of managed portfolio services at Killik & Co.
Peel Hunt’s team has made the case for instead buying Schiehallion (MNTN), the Baillie Gifford private equity vehicles with SpaceX, Wise and ByteDance in its portfolio that recently traded on a 33.6 per cent discount. The trust may prove tricky for some to buy, however, given it trades on the Specialist Fund Segment of the UK market. That segment tends to house some more niche trusts, but some investment platforms don’t allow customers to buy them, or require investors to prove they are sophisticated enough to do so.