Interactive Investor

Bargain Hunter: cheapest equity investment trusts revealed

4th August 2020 12:53

Kyle Caldwell from interactive investor


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Research in the equity investment trust universe highlights the biggest potential bargains.

While fears of a second wave of coronavirus weigh on investors’ minds, there are, on the whole, slimer pickings as far as investment trust discount opportunities are concerned.

On 23 March, which marked the market bottom for the coronavirus sell-off, investment trust discounts reached a record high of 18.4%. But since then, investment trusts across a variety of sectors have been clawing back losses, and in addition savvy investors have been taking advantage of discount opportunities. Both factors have contributed to investment trust discounts narrowing to 6% in early August, according to figures from the broker Winterflood.

Research for interactive investor by QuotedData screened the equity investment trusts with assets of at least £10 million for potential bargains. The data (as at 3 August) shows some trusts trading close to their lowest rating over the past year, including two UK smaller company focused trusts: Invesco Perpetual UK Smaller Companies (LSE:IPU) on a discount of -14.6%, and Acorn Income Fund (LSE:AIF) on a discount of -21.9%.

James Carthew, head of investment company research at QuotedData, explains: “I think there is a perception that smaller companies are less well placed to cope with the pressures of Covid-related lockdowns. Couple this with the additional uncertainty of a no-deal Brexit and investors are running scared of this part of the market.”

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Two other UK trusts trading on wider than normal discounts versus their 12-month averages are: Fidelity Special Values (LSE:FSV) (current discount of -9.5% versus a 12-month average discount of -1.4%) and Strategic Equity Capital (LSE:SEC) (-23.3% versus a 12-month average discount of -17.3%).

The former is managed by contrarian fund manager Alex Wright and, in line with other UK-focused portfolios, performance has been lacklustre of late. On a one-year view, the trust’s share price has slumped just over 30%. 

Strategic Equity Capital, meanwhile, adopts a highly concentrated approach of just 20 holdings, with no exposure to FTSE 100 businesses. Its managers Jeff Harris and Adam Khanbhai use private equity valuation techniques to find economically resilient businesses. Over the past year, its share price has fallen 20%.

Another trust that looks cheap is Jupiter Green (LSE:JGC), which invests in companies providing environmental solutions. It invests globally, with just under a third of its assets in the US.

Its current discount is -10.9%, which looks particularly favourable versus its 12-month average figure of -4.4%. Investors, though, may need to act quickly to take advantage. Carthew points out: “Jupiter Green is normally very good about keeping its discount tight – the board has said that it wants to keep the trust trading around asset value. They may be holding off from buybacks in the current market turmoil.”

Elsewhere, there are a number of income-focused trusts on wider than usual discounts owing to not being flavour of the month with investors given the challenging background for dividends. Over the past couple of months, various business have moved to cut, suspend or cancel income payments to shore up balance sheets in response to the coronavirus crisis.

Carthew picks out Henderson International Income (LSE:HINT) (-4.6%) and Polar Capital Global Financials (LSE:PCFT) (-10.7%) as two potential bargains. While Henderson International Income does not have a big discount, the discount is notable due to the fact that over the past year the trust has typically traded on a small premium.

Carthew says: “Henderson International Income has a broad geographic remit, which makes it easier for the manager to go looking for attractive income-generating stocks. Polar Capital Global Financials has committed to maintain its dividend even though regulators stopped many of the banks it holds from paying a dividend.”

How to find investment trust bargains

We identify potential bargains by comparing current discounts with their 12-month averages. Only those trusts with a wider discount than their average are considered.

The reason we stick to this “rule” is because some trusts consistently sit in a tight discount range, meaning it is not a “true” bargain and the discount is merely “normal”.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.


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