These trusts offer the prospect of a double whammy of improved performance and discount decline.
Of the various reasons an investment trust trades on a discount, the most common reasons are performance woes or poor sentiment towards how or where the trust invests.
These four trusts seem to be suffering from both factors: Murray International (LSE: MYI), Witan (LSE:WTAN), Fidelity Special Values (LSE: FSV) and Temple Bar (LSE:TMPL). Each is trading on a discount that is notably wider than its respective 12-month average discount figure.
Murray International, managed by Bruce Stout, has seen its performance lag rival global trusts in 2020, as well as being behind rivals over longer-term time horizons of three and five years. Performance has mainly been hit by its emerging-market weighting (at around 50% of the portfolio) and a lack of exposure to the famous US tech stocks, which have, overall, continued their purple patch of form in 2020.
During his overall tenure, which started on 16 June 2004, Stout has delivered outperformance compared to peers. Figures from FE Analytics show that under Stout’s management Murray International has, to 1 September 2020, returned 389% versus 310% for the average global equity income trust.
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While Stout remains cautious on the outlook for equity markets, he has recently been adding risk, shifting from defensive fixed income into equities, where he sees the potential for long-term earnings and dividend growth.
“Markets are likely to remain volatile for the duration of the year,” the manager said in mid-August when Murray International reported its half-year results to the end of June.
“Expectations are for every major economy to contract, contending with slower growth, record low bond yields and companies struggling to achieve meaningful earnings growth, in the short term. The exit from lockdown will not be smooth and will be subject to periods of reversal.”
As longer-term shareholders can testify, its performance tends to blow both hot and cold. In the meantime, while shareholders await a performance turnaround, Murray International’s dividend yield of 5.7% catches the eye, particularly given that the board has pledged to at least match its 2019 dividend payout. At the close of trading on 7 September, the trust trades on a discount of 4.5% versus its 12-month average discount of 0.1%, according to analyst Numis.
Witan, which operates under a multi-manager structure, is also going through a performance slump, falling 12% behind its benchmark in the first half of 2020.
In a bid to turn around performance, various changes have been made to the portfolio, which is mostly managed by external fund managers. Among the changes, Witan has terminated its two Europe ex-UK mandates, a global value portfolio and is in the process of selling a UK portfolio.
The proceeds have been invested in global fund managers, with two new US-based managers added that they “are focused on less cyclical and more rapidly growing companies”.
In a stock market update on 4 September Andrew Bell, chief executive officer of Witan investment trust, said: “We believe that our equity portfolio offers a balance across sectors and regions that will reward existing and new investors for their patience, both in terms of net asset value returns and a narrowing discount."
Witan’s discount is 7.9% versus its 12-month average discount figure of 4.6%.
Commenting on the potential bargain credentials of Murray International and Witan, Priyesh Parmar, an analyst at Numis, says: “It is a good time to take a look at Murray International due to its discount and a period of weaker performance, and the same is true of Witan. For both trusts, we know why they have respectively underperformed, and in Witan’s case various changes to the portfolio have been made to address performance going forward.”
Parmar also picks out Fidelity Special Values as another out-of-form trust that catches the eye. Managed by value investor Alex Wright, the trust is trading on a discount of 10.5% versus its 12-month discount average of 2.6%. “Again, we know why this trust has seen performance struggle of late. But if value as a style comes back into favour, this trust will see its performance improve and discount narrow.”
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The final out-of-sorts trust that is a trading on a wider than usual discount is Temple Bar. On 17 April, it was announced that long-standing manager Alistair Mundy was taking an extended leave of absence for health reasons (not related to coronavirus). As a result, the board (on 20 April) said that it would conduct a review of its fund management arrangements and has served 12 months’ notice on Mundy’s employer – Ninety One (formerly Investec Asset Management).
Its performance had been woeful over the short term prior to Mundy departing, owing to the manager’s contrarian investment style being heavily punished in the first quarter’s market sell-off. The trust’s net asset value slumped by 47% over the period. Mundy backs companies whose share prices have seen significant declines relative to the market.
Performance woes and uncertainty over the future direction of the trust has led to Temple Bar trading on a discount of 14.2% versus its 12-month average discount figure of 5.8%. When uncertainty over the latter concern passes – with a new fund management company announced – the likelihood is that this double-digit discount will quickly evaporate.
Given that since the end of March global stock markets have, on the whole, been clawing back losses made in the first quarter of 2020, with some markets, such as the S&P 500 fully recovering their losses, there are less discount opportunities available to investment trust investors.
This may change in the coming weeks and months if warnings from some professional investors that markets have “moved too fast, too soon” ring true and prompt a second notable stock-market correction in 2020.
Aside from the obvious coronavirus second-wave concerns and uncertainty over how Brexit will pan out, there are other threats worrying fund managers that has caused many of them to adopt a more pessimistic stance than usual.
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