Bargain Hunter: 12 investment trusts near biggest discount in five years

Investment trust bargains are back, but with so many trading on big discounts it is important to delve deeper. Kyle Caldwell searches for opportunities.

Investment trust discounts have widened notably since the beginning of the year, rising from 1.5% to 15.7% for the average discount, according to analyst Winterflood.

The bear market that’s played out this year in response to high levels of inflation, increases in interest rates and geopolitical tensions, most notably Russia’s invasion of Ukraine, has been a big factor. The ability of being able to gear (borrow to invest) has also hindered both performance and investor sentiment. In a falling market, gearing magnifies losses, which is why funds have held up better than investment trusts so far this year.

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As ever, with investment trust discounts it is important to bear in mind there will be a reason. It could be related to poor investor sentiment towards the region it invests in or the way in which it invests in terms of 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).

It is, however, unusual to see so many investment trusts trading on double-digit discounts across a variety of sectors and regions. For brave investors, those buying today and thinking long term, discounts offer the chance to try and ‘buy low’.

With discounts aplenty it is important to delve deeper. With this in mind we teamed up with QuotedData to screen the universe to identify the investment trusts trading at or close to their biggest discount over the past five years. This time period includes the first three months of 2020 – when stock markets fell heavily in response to Covid-19 turning into a pandemic. During those three months investment trust discounts hit a high of 21.4%. Therefore, there’s only a small number of trusts that today are trading close to or wider than their Covid-19 discount high.

A couple of filters were applied. The discount screen focused on trusts investing in equities that have assets of at least £25 million, and were at the end of September trading on a discount of at least 5%. But the main criterion was that a trust’s discount had to be within three percentage points of their maximum discount over the past five years. Once those filters were applied, just 12 trusts remained, outlined in the table below.

Six of the 12 trusts invest in UK shares: Murray Income Trust (LSE:MUT), Baillie Gifford UK Growth Trust (LSE:BGUK), Mercantile (LSE:MRC), Aberforth Smaller Companies (LSE:ASL), and abrdn UK Smaller Companies Growth (LSE:AUSC).

James Carthew, head of investment companies, QuotedData, points out that such trusts “are similarly afflicted by being focused on UK equities at a time when the government is doing its best to accelerate and deepen the oncoming recession.”  

He adds: “Within that group, Mercantile, being large, liquid and focused on the FTSE 250 index, which is often used a proxy for the UK economy by investors (as opposed to the FTSE 100 which has more global businesses), finds itself both unloved and the owner of a number of stocks that are being shorted by international investors, betting that they can profit from a falling UK market.

“Baillie Gifford UK Growth and Aberforth Smaller Companies are polar opposites in terms of investment style (one growth, one value) and the fact that they are both out of favour reinforces the view that the problem is an anti-UK bias amongst investors.”

Carthew added, the discounts for Murray Income and abrdn UK Smaller Companies Growth reflect underwhelming short-term performance. The latter will see its longstanding manager Harry Nimmo retire at the end of this year, replaced by Abby Glennie. 

Two trusts that invest in fast growing emerging market or frontier markets have seen their discounts widen close to their five-year record levels: Fidelity Emerging Markets (LSE:FEML) and BlackRock Frontiers (LSE:BRFI). The strength of the US dollar in 2022, boosted by its status as a safe-haven currency in troubled times, has negatively impacted emerging markets, due to such countries having significant amounts of dollar-denominated debt. Another headwind has been China, amid concerns over its economy, due to its slumping property market and Covid-19 lockdowns in a number of cities.

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Another trend is that two European trusts feature, with the Russia/Ukraine war and ongoing energy crisis weighing on sentiment. In addition, Carthew points out European Opportunities Trust (LSE:EOT)“is yet to regain investors’ trust after the debacle of Wirecard.” He continues: “This was its largest holding and was way too big a position, which turned out to be a fraud, hurting performance and denting the credibility of the manager.”

A final thing to bear in mind is that when discounts widened during the Covid-19 sell-off in the first quarter of 2020, they didn’t stay at high levels for long as markets started to recover from early April onwards. However, this time around the sell-off has been gradual throughout the year and investor sentiment remains poor. Therefore, the big discounts could be around for a while yet.

Trusts trading close to record five-year discounts 

Source: QuotedData. All data to end of September 2022.