Investors looking to bag a bargain need look no further than the investment trust sector where risk-off sentiment has this year sent discounts to levels not seen since the financial crisis.
At the end of 2021 – before the war in Ukraine fuelled energy and food price inflation, leading to sharply rising interest rates – the average investment trust discount stood at 2.2%. By the end of October 2023, the figure had ballooned to 16.9% – the widest month-end discount since the financial crisis, according to the Association of Investment Companies (AIC).
Annabel Brodie Smith, its communications director, says: “November has seen a change of mood with better-than-expected inflation figures prompting an early Santa rally and discounts coming in to 12.3% by the end of the month. Although discounts have narrowed, many analysts believe they represent a long-term buying opportunity.”
We asked a range of advisers, wealth managers and analysts to name the bargain investment trust they would like to find in their Christmas stocking this year.
Having languished on a discount of 22% in the first half of this year, shares in global Goliath Scottish Mortgage (LSE:SMT) have recovered to a 12.3% discount (as at 11 December 2023) – nevertheless markedly different from the small premium they have commanded for much of the last decade.
“Our confidence in SMT’s investment strategy remains and this unique and high active share approach has proven its ability to create substantial alpha and pick companies at the helm of transformative themes,” says Dzmitry Lipski, head of funds research at interactive investor.
IpsoFacto Investor reckons Brunner (LSE:BUT), with its 11.3% discount, offers “definite value”. Director David Liddell says: “That’s not to say there aren’t trusts on much wider discounts but many are in sectors like property, infrastructure and illiquid bonds where there’s a high degree of valuation risk. Brunner has a straightforward liquid quoted portfolio of global equities, so its discount is ‘real’ and well above its long-term average.”
In the global sector, BUT’s five-year net asset value (NAV) performance is second only to SMT, with considerably less volatility.
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Aberforth Smaller Companies
In the UK smaller companies sector, Kepler Trust Intelligence highlights the 9.9% discount at Aberforth Smaller Companies Ord (LSE:ASL) as one element of a quadruple discount opportunity.
“In our recent meeting, the managers highlighted the fact that UK small-caps remain cheap versus large-caps, and the UK remains cheap versus global equity markets,” says analyst Ryan Lightfoot-Aminoff.
He adds: “Considering as well that a value portfolio is naturally on a discount to the market and ASL’s shares trade on a discount to NAV, there’s an effective quadruple discount.”
European Smaller Companies
Despite its long-term outperformance, Janus Henderson’s European Smaller Companies Trust PLC (LSE:ESCT) has sunk to a 14.9% discount – the deepest in its peer group. Lipski likes the approach of favouring companies that are overlooked by the market but have barriers to entry, differentiated business models and strong management. “Valuations across European markets have fallen to levels below recent averages, throwing up opportunities for value-minded investors such as ESCT and exacerbating the perceived cheapness of the already discounted trust,” he says.
Baillie Gifford Shin Nippon
Smaller companies in Japan are also on Lipski’s watchlist with Baillie Gifford Shin Nippon (LSE:BGS) trading at a 12.3% discount. Aside from a brief period in early 2020, this represents the deepest discount for BGS in more than a decade and the widest discount among peers.
The growth style of the manager – targeting disruptive and dynamic Japanese small-caps with substantial future growth potential – has been out of favour but Lipski says: “If sentiment towards portfolio companies recovers and valuations normalise there could be scope for a reversal of fortunes for the trust.”
Downing Renewables & Infrastructure
Renewables and other infrastructure sectors present a buying opportunity for long-term investors. “Once the darlings of the investment trust world, they are now the pariahs,” says Ben Yearsley, investment director at Plymouth-based Shore Financial Planning. He highlights Downing Renewables & Infrastructure Ord (LSE:DORE) with its 26.5% discount and 6.2% yield.
It owns mainly Nordic hydro and UK solar projects. All assets are operational and 68% of revenues are fixed. “DORE is a great opportunity to lock in a high and rising income stream at a big discount to NAV,” adds Yearsley.
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Gresham House Energy Storage Fund
In the battery storage sector, Peel Hunt points to positive prospects for Gresham House Energy Storage (LSE:GRID) Fund, which has a 25.3% discount and 6.7% yield. “There are several near-term catalysts that could see an improvement in fortunes for the strategy,” says analyst Markuz Jaffe.
GRID has several projects expected to become operational over the next year. Additionally, from mid-December 2023 battery storage assets are expected to have greater access to the “balancing mechanism” – the British network operator’s main tool for balancing supply and demand.
Cordiant Digital Infrastructure
With a 35% discount, Winterflood Securities believes Cordiant Digital Infrastructure (LSE:CORD) represents an attractive opportunity. “Its ‘buy, build and grow’ strategy is an interesting diversifier, providing a solid platform for growth through mid-market deals made at reasonable multiples…and supported by digitalisation tailwinds,” says analyst Elliott Hardy.
CORD’s latest interim results highlighted key achievements at its two largest assets, and the acquisition of Speed Fibre in Ireland, which adds geographical and technological diversification and should help to support the dividend cover.
Sequoia Economic Infrastructure Income
For income-seeking investors, Sequoia Economic Infrastructure Income (LSE:SEQI) has been on Ravenscroft’s recommended list since its inception in 2015. The trust offers debt exposure to infrastructure assets such as data centres, healthcare facilities and energy generation. “Its high-quality team is always working to keep the portfolio fresh and relevant within the context of ever-changing market and economic environments,” says Ravenscroft investment manager Bob Tannahill. SEQI is on a 10.4% discount and yields 8.3%.
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Private equity proposition HgCapital Trust (LSE:HGT) is one of Deutsche Numis’ favourite trusts based on the strength of its track record and nature of the underlying portfolio, which is focused on “dull” technology companies providing mission-critical software in areas such as accounting, payroll and compliance.
“The portfolio generates high levels of recurring revenues through its subscription services from a diversified client base, which we believe is an attractive place to have exposure to in difficult macro conditions,” says analyst Gavin Trodd. HGT can be picked up at an 18.5% discount to NAV.
Winterflood’s Shavar Halberstadt highlights Seraphim Space Investment Trust (LSE:SSIT) as a “particularly poignant example of excessive de-rating”. He notes: “Whereas higher interest rates have naturally reduced the attractiveness of longer-dated cashflows and the SSIT portfolio includes immature seed investments, one wonders whether a discount to NAV of 64.5% is justified. This must be weighed against the immense addressable market for space technology, including defence and climate applications, and the fact that many portfolio companies are revenue generating and attracting capital despite market conditions.”
HydrogenOne Capital Growth
HydrogenOne Capital Growth (LSE:HGEN) – and its 52.5% discount – is QuotedData’s best bargain. “HGEN has great potential,” says its head of investment companies James Carthew. He adds: “The two-year-old fund has established an interesting portfolio of businesses that are seeking to profit from the rapid expansion of the green hydrogen sector. Globally, governments have recognised the need to decarbonise the existing hydrogen sector and there’s also considerable potential demand as we seek ways to decarbonise heavy industry and transport.”
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Against a backdrop of rising interest rates property trusts have significantly sold off over the last two years. Winterflood’s Emma Bird reckons the 33.1% discount at Tritax EuroBox Euro Ord (LSE:BOXE) is attractive.
“The long-term outlook for the fund remains positive, supported by structural sector growth drivers related to the roll-out of e-commerce across Europe, as well as the management team’s ability to add value through asset management initiatives,” she says.
EBOX boasts a yield of 7.1% with the dividend fully covered by earnings in the latest financial year.
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