Bargains are thin on the ground, but these trusts are all trading on discounts for the same reason.
Investment trust bargain opportunities are in short supply, despite most trusts trading on a discount to their net asset value (NAV).
Figures from analyst QuotedData show that (as at 19 March) there were 284 investment companies trading on a discount, which is 78% of the universe.
But with the median discount standing at 6.9%, versus a record high of 18.7% in the depths of the Covid-19 sell-off last March, it has become harder to find a bargain.
In this column we identify bargains by comparing current discounts with their 12-month averages. Only those trusts with a wider discount than their average are considered. We also look at the overall sector and the quality of the trust, and then take a view on whether the discount is potentially a good opportunity.
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Prior to the vaccine breakthroughs in early November, there was more choice in terms of potential bargain opportunities. At the time, a number of UK and emerging market-focused trusts were trading on discounts wider than their 12-month averages.
Fidelity Special Values (LSE: FSV), for example, was trading on a discount of 6.3% (on 5 November), but is now trading on a premium of 1.6%. Over the past 12 months, it has typically traded on a 3.8% discount. For most other UK trusts discounts have narrowed.
Among emerging market trusts discounts have also fallen. On 5 November, BlackRock Frontiers (LSE:BRFI), Templeton Emerging Markets (LSE:TEM) and Utilico Emerging Markets (LSE:UEM) were all trading on higher discounts than their 12-month averages. But today all emerging market trusts are trading on discounts below their 12-month averages – so there are no standout bargains.
For both UK trusts and emerging market trusts, discounts have narrowed following an improvement in investor sentiment. Both are tipped to be beneficiaries of the ‘reflation trade’, given their more cyclical nature.
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While predictions of a resurgence in value investing are being made, growth stocks (particularly technology companies) have come off the boil over the past six weeks or so. As a result, discounts have widened for trusts that have a heavy emphasis on technology.
Plenty of column inches have been dedicated to the short-term performance of Scottish Mortgage (LSE: SMT), which has been caught up in the wider sell-off due to its focus on businesses with disruptive technology.
Its share price dip started on 15 February, when trading at 1,415p per share. From peak to trough during this period (when the shares fell to a low of 950p on the morning of 8 March) the share price declined by 30%. Ahead of the market opening this morning, Scottish Mortgage’s share price stood at 1,095p. It is trading on a discount of around 5%, which is higher than usual as its 12-month average discount figure is 0.3%.
On 19 March, it was announced that James Anderson, the joint manager of Scottish Mortgage, plans to retire from fund management next year and that he will step down from the trust on 30 April 2022. Anderson has managed the trust since April 2000.
The fund managers of Allianz Technology and Polar Capital Technology tilt their portfolios towards the biggest technology themes they believe have the best growth prospects in the years ahead.
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Of the famous five FAANG stocks, Allianz Technology favours Alphabet (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN), which are two of its top three holdings, accounting for 6% and 3.8% of the trust. Apple (NASDAQ:AAPL) is also in the top 10, a weighting of 2.3%.
Polar Capital Technology tends to have bigger stakes in the biggest companies in the index. It has just under a quarter of its assets in Microsoft (NASDAQ:MSFT), Apple and Alphabet.
Manchester & London is even more concentrated. It has just under half its portfolio (at around 46%) in four tech companies: Microsoft, Alibaba (NYSE:BABA), Amazon and Alphabet.
All four trusts are currently trading on wider discounts than their 12-month averages, as the table below shows.
The four tech-focused trusts on wider than usual discounts
|Investment trust||Current discount (-)||12-month average discount (-)/premium figure|
|Manchester & London||-11.9%||-1.5%|
|Polar Capital Technology||-8.5%||-3.1%|
|Allianz Technology||-7.2%||0.2% (premium)|
Source: Winterflood. Data as at 29 March.
Despite giving investors a bumpy ride in recent weeks, various experts, including Nigel Bolton, co-chief investment officer of fundamental equities at BlackRock, note that “many of the winners over the past decade should keep winning – and continue to benefit from trends accelerated by the pandemic”.
Therefore, tech shares and other growth companies could continue to serve investors well. As analyst Numis has pointed out, it would be a bold call to bet against the “increasing dominance of technology and changing consumer habits following the Covid-19 crisis, particularly when supported by low interest rates”.
The author owns shares in Scottish Mortgage (LSE:SMT), alongside other investment trusts and funds.
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