Interactive Investor

Bargain Hunter: four investment trust discounts not reflecting reality

Faith Glasgow asks experts to name investment trusts that are performing well, but despite this still trade at wide discounts to net asset value.

7th August 2023 08:45

by Faith Glasgow from interactive investor

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Conducting some research into an investment 600

Most major markets rose in July, as did hopes that a US recession can be averted, while better-than-expected inflation news provided a welcome fillip for interest-rate sensitive sectors of the investment trust world such as infrastructure and growth capital.

Investment trust discounts have therefore tended to narrow somewhat over recent weeks. However, that’s not a universal trend, and opportunities remain for investors seeking funds with portfolios that have performed robustly over the past year yet still trade at wide discounts to net asset value.

Tech trust benefiting from AI, but still cheap as chips

Thomas McMahon, an analyst at Kepler Partners, picks out Allianz Technology Trust, which sits on a discount of -12.4% (as at 4 August), despite achieving 17% net asset value (NAV) returns over the year to end July.

It has benefited from the recovery in large-cap technology since the end of 2022, and from the AI boom over the past few months. Nonetheless, it has lagged relative to the mega-caps, gaining 30% over the first half of 2023 compared with 33% for the Dow Jones World Technology index.

“It has a strong tilt to the mid-caps, building on the knowledge and expertise of its specialist management team. As such it stands in a good position to benefit from any broadening of the recovery in the technology sector, as the leaders inevitably slow,” McMahon comments.

He adds: “Given how central technology is likely to remain to the economy, this looks like an attractive discount on which to be getting access to the sector for the long term.”

Smithson’s performance turnaround, but discount remains wide

Smithson Investment Trust, highlighted by Alan Brierley at Investec, takes a high-conviction, long-term view on high-quality mid and small-cap companies worldwide.

It has produced NAV returns of 11.7% and share price returns of 7% over the first half of 2023, against a benchmark total return of just 1.9%. Yet the discount remains under pressure at -11.9%, significantly above the 52-week average of 9%, as smaller companies continue to struggle in the current environment.

As Brierley notes: “Its now almost five years since IPO, and despite the most challenging of economic backdrops and market conditions, Smithson has delivered attractive absolute and relative returns.” Over those five years it has managed a NAV total return of 59%, well ahead of the benchmark’s 41%.

“We like the focus on quality growth, which we expect to underpin superior long-term growth, while the current discount is attractive,” he adds.

The improved performance NAV performance in 2023 will be welcomed by its shareholders. In 2022, the Smithson share price dropped 35.2% and the net asset value (NAV) of its companies fell 28.1%. For comparison, the MSCI World Small and Mid Cap Index declined 8.7%.

Making the case for some alternative assets

Infrastructure trusts have become a very popular choice for portfolio diversification and particularly among income-seeking investors in recent years. But rising interest rates have made for a challenging period over the past year.

At QuotedData, analyst David Johnson likes JLEN Environmental Assets, a trust that invests in environmental infrastructure projects generating index-linked cash flows and supporting the transition to a low carbon economy.

JLEN has returned around 6% over the last 12 months to end July, but its discount to NAV has widened significantly, and now sits at -15.9%. “This compares to an average discount over the past 12 months of -3.4% and a 12-month high of +8.3% (a premium),” points out Johnson.

He maintains that this reflects the macroeconomic challenges facing the trust and the impact these have had on investor sentiment, rather than portfolio issues.

In fact, he says: “Inflation has been a net positive for the trust, given the positive correlation via RPI-linked subsidies. So too were higher power prices. Even though these have subsided, JLEN was able to lock in some of the benefit through forward sales of power.”

The difficulty is that higher interest rates are set to impact the discount rates used to calculate the net present value of JLEN’s future cash flows. “This is a problem shared by almost all other alternative asset funds,” explains Johnson. “JLEN has already begun accounting for higher discount rates, increasing its average discount rate by 0.9% over the 12 months ended 31 March 2023.”

However, the manager has been cautiously adding to JLENs exposure to assets under construction. “The modest exposure that the fund has to such assets has the potential to further boost JLENs NAV returns as these projects become operational and are de-risked,” he adds.

Also at QuotedData, Andrew Courtney picks out GCP Infrastructure, which has a UK focus, investing predominantly in infrastructure projects with long-term public sector-backed revenues.

Shares have fallen by 29% over the year and the discount now sits at 30.4%. Yet It has achieved NAV returns of 4.4% during that time, benefiting from the fact that almost half its assets have some form of inflation protection.

“There appears little to justify such an extreme discount given the fund’s ongoing execution, and with thematic tailwinds (a focus on renewable electricity assets) driving long-term cashflows, it is only a matter of time before its dividend of over 8% begins to attract attention once again, particularly if inflation continues to trend lower,” Courtney comments.

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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