Bargain Hunter: discounts no longer at record highs, but bargains remain

Potential investment trust opportunities and a standout sector are highlighted by Kyle Caldwell.

Time will tell whether the last couple of weeks, in which global markets have been moving upwards and clawing back losses, will prove to be a “relief rally” before another correction takes place.

Various market commentators believe markets are far from out of the woods, with some pointing out the risk of a second wave of coronavirus cases later this year. Moreover, when looking back at history, steep market falls are not resolved in a matter of weeks or months. Research by Schroders, the fund manager, found that in seven of 11 bear markets over the past 148 years in which the S&P 500 index declined 25% or more, it took just under two years for losses to be repaired.

- 11 of the biggest investment trust discount moves over past month’s steep market falls
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While there’s always the threat of more steep falls, plenty of investors have been bargain-hunting. In the case of investment trusts, discounts reached a record high of 18.4% on 23 March. That compares with an average discount of 17.6% on 31 December 2008.

Just under one month later, the average discount has narrowed to 7.9%, which shows that some investors have been on their toes and taken advantage of opportunities arising during the sell-off.

In particularly high demand have been trusts that usually trade on a premium. Our article last month highlighted 11 trusts that had seen their premiums turn into discounts. In all but four cases trusts have returned to premiums, the exceptions being JPMorgan Global Growth & Income (-7.8% discount), TR Property (-5.1%), Invesco Enhanced Income (-0.7%) and Murray International (-0.1%).

Across the seven other trusts that are now trading on premiums, the narrowing of discounts has been very swift. For example, this time last month (20 February) Scottish American and Smithson were both trading on discounts of around -20%. They are now trading on premiums of 8.4% and 4.3%, respectively.

While discounts have narrowed, and notably so in certain cases, potential opportunities remain. Analyst Numis notes: “The extreme and often indiscriminate discounts of a few weeks ago have generally narrowed, and often limited liquidity was available when discounts were at their widest. We believe there may be pockets of value, but investors also need to be focused on the outlook for the underlying asset class.”

One sector that stands out, according to Numis, is listed private equity. It adds: “We see value across the listed private equity sector, and believe the write-downs may be more muted than investors expect, due to exposure to more defensive sectors (such as technology and education) and the strength of balance sheets, even in the event of declining assets values. We believe Pantheon (-38% discount) and HarbourVest (-38% discount) offer attractive ways to access the asset class on a diversified basis and a wide discount.”

In terms of more mainstream sectors, Numis points out that Perpetual Income & Growth looks cheap on a 11% discount, and there’s scope for this to narrow over time when a new manager is appointed. Earlier this month, longstanding fund manager Mark Barnett of Invesco was fired.

Numis also picks out Edinburgh investment trust, which Barnett was also sacked from in December. Invesco was replaced by Majedie Asset Management, and Numis says the current discount of 10% could narrow if a performance turnaround occurs.

Additionally, the broker highlights AVI Global, available on a discount of -12%. The trust benefits from a “double discount”, which stood at -45% at the end of March and reflects the underlying discounts on the various holdings in AVI Global.