The investment trust sector has not had it easy over the 20 months or so, as rocketing inflation and ongoing interest rate hikes have depressed growth prospects and stifled investor demand for risk assets across the board.
The downbeat economic outlook has left most investment trusts – even those whose popularity ensures their share price is normally trading on a premium.
In our latest Bargain Hunter article, we look at a selection of trusts that had been trading on a premium, but are now on a discount. This offers the opportunity for investors to buy on the cheap.
Perhaps the most obvious equity bargain, currently being highlighted by broker Winterflood on its ‘cheap’ list, is Lindsell Train Ord (LSE:LTI) IT. Over the past year, it has averaged a 2.4% premium, but at present (as at 25 September) it is trading at a discount of 9.6%.
LTI has an impressive long-term record, with total returns averaging 16.3% per year over the 15 years since the financial crisis - better than any non-technology-focused trust, according to QuotedData’s senior analyst Matthew Read.
“It has attracted a strong following and has frequently traded at a premium to NAV,” says Read. However, a significant part of LTI’s NAV is its unlisted holding in the eponymous management company.
Over the long term, Lindsell Train has performed strongly, but its funds struggled in 2021 and 2022; with outflows on top of this, its assets under management have reduced by around a third over the past two years, reducing its capacity to earn fees and its attraction for investors.
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Read adds: “Overall, we think the market struggles to value the management company, which gives rise to some additional volatility in LTI’s discount. In better times, its premium to NAV has touched 90%, and so today’s discount looks much better value. It’s also got a reasonable exposure to consumer defensive stocks, which should help if markets deteriorate from here.”
Another equity-focused opportunity is the UK large-cap trust Shires Income (LSE:SHRS), currently trading on a -8.7% discount versus a one-year average of 2.9%.
As Read explains, this abrdn trust has done well on the back of its high-income focus, with dividend income boosted by a portfolio of preference shares and other fixed-income securities, while capital and dividend growth is bolstered by some lower-yielding equities.
“Like many income funds, SHRS has suffered as interest rates/inflation expectations have risen, impacting both its equity and fixed-income portfolio – and it has also been weighed down by its heavy exposure to the UK,” he says.
However, Read adds that as inflation trends downwards, with interest rates hopefully following. “SHRS could see increased demand for its strategy again, with the potential for a strong re-rating,” he says.
Many of the popular income-generating alternatives trusts have been particularly hard hit, as savings and fixed-income alternatives have gained popularity. Notably, utilities and infrastructure have suffered as interest rates have risen, particularly given their long-term perspective.
Among the infrastructure-focused sectors, Read highlights Ecofin Global Utilities & Infrastructure Income (LSE:EGL), which aims to pay a 4% annual dividend, delivered quarterly, and to provide both long-term growth and capital preservation.
EGL has frequently traded at a premium over the past year, but now sits on a -14.9% discount.
Its problems have been compounded recently, explains Read. He points out: “Renewables (which EGL has a strong focus on) have come under pressure as the tailwind of the energy transition has turned headwind, with investors focusing on the costs of moving to net zero as the global economy slows.”
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Again, however, he suggests that EGL’s conservative approach could see a return to favour as interest rates start to fall and economic growth stalls.
Sector peer Greencoat Renewables (LSE:GRP) is in a similar position, trading at around par on average over one year but recently on a discount of more than -11.5%. Of the two infrastructure trusts, though, Read favours EGL on the grounds of its better long-term performance and more diverse portfolio, as well as its more attractive valuation.
Gavin Trodd, research associate at broker Numis, takes a somewhat longer perspective, focusing on trusts that have fallen over the past year from longstanding premiums.
He, too, homes in on the infrastructure sector, and in particular International Public Partnerships Ord (LSE:INPP). Its share price has reached as high as 6.6% premium to NAV over the past year. It now sits on a -16% discount as rate rises persist.
Despite that, Trodd points to the trust’s “continued strong portfolio performance (evidenced by cash generation), robust leverage position with limited exposure to higher interest rates, healthy dividend cover and differentiated portfolio”.
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.
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