20 investment trusts cheaper now than during Covid-19 sell-off

Three years ago was a great opportunity to pick up bargains among investment trusts as the Covid-19 pandemic caused widespread panic and fear. This screen identifies those trading on even bigger discounts now.

For long-term investors with nerves of steel sharp stock market falls offer opportunities to ‘buy low’.

Three years ago is a case in point. In response to the emergence of Covid-19, stock markets fell notably, with the FTSE All-Share and MSCI World indices losing 25.1% and 15.7% respectively over the first quarter of 2020.

During that three-month period, investment trust discounts (on average) hit a record high of 21.4%. However, big bargain opportunities did not stick around for long, and when markets started to recover from early April 2020 onwards, discounts quickly narrowed to below 10%.

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The sharp falls during that sell-off, and the subsequent recovery, serves as a reminder to investors that over time stock markets tend to recover their poise. Periods of short-term pain are part and parcel of investing in the stock market in pursuit of (hopefully) long-term gains that will yield greater rewards than cash and outpace inflation.

Plenty of bargains remain

Three years on, plenty of investment trusts remain on higher-than-usual discounts, reflecting lower investor sentiment over the past year amid concerns about high inflation and interest rate rises. Figures from Winterflood, the analyst, show that at the end of January the average investment company discount stood at 13.5%, while the average 10-year discount is 4.9%.  

For those looking for wider discounts than three years ago during the Covid-19 sell-off, there’s not a huge amount of choice, as research by QuotedData shows. The firm ran data for interactive investor to find out which investment trusts are trading on bigger discounts today (five percentage points or more higher) than at their peak discount during the Covid-19 sell-off.

In total, 20 investment trusts made the cut, with many investing in a specialist area of the market. Such trusts should only be considered to be a small part of a well-diversified portfolio.

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As ever, with investment trust discounts it is important to bear in mind that there will be a reason for the discount. It could be related to poor investor sentiment towards the region it invests in, or towards the way in which it invests in terms of the investment style. Moreover, the discount could go higher, and there are no guarantees the discount will, over time, reduce towards the value of the underlying investments held in the trust – the net asset value (NAV).

Interest rates have caused discounts to widen

A key reason why many of the 20 investment trusts are trading on wider discounts compared with three years ago is due to them being negatively impacted by rising interest rates.

James Carthew, head of investment companies at QuotedData, says: “Eastern European property company Globalworth Real Estate Investments (LSE:GWI) has been impacted by rising interest rates, which are driving up property yields, and driving down valuations. The economic impact of the war in Ukraine has also been unhelpful.

“Schiehallion Fund (LSE:MNTN) has a high exposure to unprofitable growth stocks, exactly the kinds of shares that have been hit hardest by the ‘risk-off’ attitude of investors that has accompanied the increase in interest rates.”

The same rings true for Baillie Gifford US Growth (LSE:USA) and Chrysalis Investments (LSE:CHRY). Both performances have suffered due to investors being sceptical about the valuations set by investment trusts for unlisted shares, as the published valuations have fallen less than listed companies.

Baillie Gifford US Growth has substantial holdings, which can represent up to 50% of the portfolio, in unlisted companies. This is on the grounds that many companies in the US today remain private for longer before seeking a listing on a public stock market.

Chrysalis Investments holds unlisted companies and buys fledgling companies that might make it big, such as buy now, pay later firm Klarna and digital bank Starling.

Carthew adds that RTW Venture (LSE:RTW) and Syncona (LSE:SYNC) “have to some extent been caught by the aversion to unprofitable growth investments”.  

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Hipgnosis Songs (LSE:SONG) has also been affected by rising rates. However, while there may be downward pressure on song valuations to come, the main problem, according to Carthew, has been the big jump in its borrowing costs.

He points out that: “It has now managed to fix these but at levels not far off the cash yield on its portfolio. There are hopes that the cash yield will rise as the impact of increased royalty rates for songwriters and price hikes for music subscription services such as Spotify (NYSE:SPOT) flow through to the company. However, until investors have clear evidence of this, the jury is out.”

Rising interest rates are also a headwind for property investment trusts. Carthew points out that even Supermarket Income REIT (LSE:SUPR), which he says has been one of the most-popular property companies in recent years, has not been immune.

In the cases of Civitas Social Housing (LSE:CSH) and Triple Point Social Housing REIT (LSE:SOHO), he says both have been knocked by problems with some tenants. 

Ground Rents Income Fund (LSE:GRIO), meanwhile, launched a shareholder consultation process in December. Carthew says that it is yet to report on the results of this. He adds: “Building safety issues (following Grenfell) and residential leasehold regulatory reforms may mean that the recommendation is that the fund winds up – shareholders are being offered a continuation vote.”

Another important thing to bear in mind with investment trust discounts is that they typically have a greater tendency to converge to their mean discount rather than the value of their underlying investments.

Therefore, it is useful to consider the current discount versus history, and take a view over one, three and five years, for example. It is also worth comparing an investment trust discount with its wider sector.

Trusts trading on bigger discounts than during the Covid-19 sell-off

Source: QuotedData. Past performance is not a guide to future performance.