Some trusts have seen premiums cool, while others are trading on potentially unjustly wide discounts.
The pick-up in market volatility of late, amid concerns over rising inflation levels and the emergence last month of the Omicron variant, has led to a welcome increase in potential investment trust discount opportunities.
For the investment trust sector as a whole, discounts are narrow. Data from Winterflood shows that since the start of 2020 the average discount stands at 4.2%. Currently, the average discount is a bit lower, at 3%. Over this period, the average discount peaked at 21.4% during the Covid-19 market sell-off in March 2020.
As we approach the end of the year, a time when many investors review how their portfolios have fared and are on the lookout for opportunities, we asked QuotedData to screen the universe of equity investment trusts for potential bargains. The analyst ranked the 25 cheapest trusts in order of their ‘Z-scores’.
This metric is viewed as a good indicator of a significant change in a discount or premium over a certain time period, with one year used on this occasion. A positive z-score shows the current value is higher than the mean, while a negative value indicates the opposite. As a rule of thumb, a Z-score of minus 2 or lower suggests the trust is looking cheap, while a positive score of 2 or more suggests it looks expensive.
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The table at the bottom of this article shows the cheapest 25 equity trusts, with all data to the close of trading on 10 December 2021. Each trust’s discount is higher than their one-year average discount figure. In many cases, the current discount is close to/the highest it has been over the past year.
As ever, further analysis needs to be carried out to determine whether the trust’s discount is justified or cheap for a good reason.
Some trusts have seen their premiums cool, and are now trading at near to the sum of their parts, the net asset value (NAV): Scottish American (LSE:SAIN), US Solar Fund (LSE:USF), Henderson Far East Income (LSE:HFEL) and Baillie Gifford Shin Nippon (LSE:BGS).
Other trusts have become cheaper for all the wrong reasons. James Carthew, head of investment company research at QuotedData, urges caution in a number of cases.
For example, he points out that Crystal Amber Fund (LSE:CRS), the AIM-listed activist investor that mainly backs small and mid-cap UK stocks, recently lost a continuation resolution at its annual general meeting. “We are waiting to see what happens next. Wind-up situations can unlock discounts over time, but it may be a forced seller of some large positions in relatively illiquid companies,” says Carthew.
But there are also some potential opportunities. In particular, Carthew is positive on the prospects for Ecofin Global Utilities & Infrastructure (LSE:EGL), Foresight Solar Fund (LSE:FSFL) and JPMorgan Indian (LSE:JII).
He comments: “Ecofin Global Utilities & Infrastructure Trust has been trading very well but the shares took a tumble around the end of November when the Omicron variant emerged. There's no good reason why its NAV would be affected by this. We would expect that the discount closes up again.”
In the case of Foresight Solar Fund, Carthew observes that it is unusual for renewable energy trusts to trade at discounts, given how popular this part of the market has been over the past couple of years. He adds: “We know that there have been some concerns about the direction of long-term power prices, but the inflation-linked nature of the subsidy income and the high prices being achieved for power sales now may help sentiment recover.”
For JPMorgan Indian Investment Trust, its current discount is perhaps a reflection of it not keeping pace with two of the three trusts in its sector. Both Ashoka India Equity Investment (LSE:AIE) and India Capital Growth (LSE:IGC) have performed much better, up 55.3% and 46.6%, according to share price total return figures from Morningstar via the Association of Investment Companies (AIC). In contrast, JPMorgan Indian Investment Trust has returned 20.3%. Nevertheless, Carthew says “this discount looks way too wide”.
Carthew also pointed out that Fidelity Asian Values (LSE:FAS) and Aberdeen Asian Income (LSE:AAIF) are “not doing too badly” in terms of performance, and as a result their current discounts may be undeserved.
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Also in the table are four trusts that will be very familiar to investors: City of London (LSE:CTY), Fundsmith Emerging Equities Trust (LSE:FEET), Lindsell Train Investment Trust (LSE:LTI) and Finsbury Growth & Income (LSE:FGT). In each case, rival trusts have performed better, either of late or over longer time periods.
In the case of City of London, which has a formidable reputation as an income-producing investment trust having increased dividends for 54 consecutive years, its return over one and five years is below the average UK equity income trust. It has returned 12.1% and 22.4% versus 17% and 35.4% for the sector.
Fundsmith Emerging Equities Trust has produced middle-of-the-road returns over one year, a loss of -0.6% versus a sector average return of 1.3% for the global emerging markets trust sector. However, it is notably behind its trust sector average over five years, with a return of 30.2% versus 66.1%.
Finally, the short-term performance woes of Lindsell Train Investment Trust and Finsbury Growth & Income Trust have been widely reported over the past couple of months.
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Earlier this month, Nick Train, co-manager of Lindsell Train Investment Trust and lead manager of Finsbury Growth & Income Trust, conceded that the funds and investment trusts he manages are experiencing “arguably the worst period of relative investment performance in our 20-year history”.
Its investment style of owning high-quality growth companies has not paid off over the past year, but over the long term has paid off handsomely. As well as the style proving a headwind over the short term, there have been a number of stock selections that have disappointed in 2021.
The top 25 cheapest equity investment trusts
|Investment trust||Discount (-) or Premium (+) as of close of trading 10 December||1 year average||1 year high||1 year low||Z-score|
|Aquila European Renewables Income Fund||-4.8||+5.7||+12.2||-4.8||-2.69|
|Crystal Amber Fund||-30.6||-23.5||-17.0||-30.6||-2.25|
|City of London||-0.8||+1.9||+6.7||-1.1||-2.08|
|Hansa Investment Company Ltd 'A' Class A||-37.2||-33.2||-28.4||-37.3||-2.02|
|Lindsell Train Investment Trust||+5.6||+18.7||+41.4||+5.4||-1.98|
|Aberdeen Latin American Income||-15.3||-11.1||-3.1||-16.8||-1.97|
|Fidelity Asian Values||-7.3||-3.1||+2.6||-9.2||-1.91|
|Trian Investors 1 Limited||-30.4||-21.8||-15.7||-31.5||-1.91|
|Hansa Investment Company||-36.9||-32.9||-26.5||-37.9||-1.88|
|US Solar Fund||+2.8||+8.1||+13.0||+2.3||-1.87|
|Henderson Far East Income||-0.8||+1.5||+3.9||-2.0||-1.85|
|VPC Specialty Lending Investments||-24.8||-18.4||-9.5||-26.8||-1.84|
|Ecofin Global Utilities & Infrastructure||-6.1||-1.5||+3.8||-8.5||-1.80|
|Marwyn Value Investors||-37.9||-33.9||-28.5||-38.4||-1.80|
|BlackRock World Mining||-8.0||-2.3||+3.4||-10.1||-1.73|
|Foresight Solar Fund||-2.7||+4.4||+11.1||-5.5||-1.64|
|Baillie Gifford Shin Nippon||-1.2||+2.5||+9.7||-2.9||-1.63|
|Fundsmith Emerging Equities||-9.2||-6.4||-1.1||-10.0||-1.59|
|Aberdeen Asian Income||-12.5||-10.5||-6.8||-14.7||-1.48|
|Bluefield Solar Income Fund||+2.7||+9.9||+18.1||+1.9||-1.48|
|Finsbury Growth & Income||-4.8||-2.0||1.3||-5.2||-1.43|
Source: QuotedData. All data to close of trading 10 December 2021.
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