Interactive Investor

Black Friday 2019: three investment trust bargains to take advantage of

28th November 2019 14:11

Kyle Caldwell from interactive investor


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Ahead of Black Friday, we pick out three investment trust bargains. 

It is that time of year once again when billions of pounds will be handed over by consumers on the hunt for Black Friday bargains. But as far as investors are concerned, bargain-hunting is not reserved for just one day of the year – particularly for those who are fans of investment trusts.

Our investment trust bargain hunter column aims to identify investment trusts on unusually wide discounts throughout the year when they arise; but in the spirit of Black Friday we once again teamed up with Adrian Lowcock, head of personal investing at Willis Owen, to highlight three investment trusts that currently offer a good potential entry point for investors.

Proof that investment trusts turbocharge investor returns

Harbourvest Global Private Equity

First up is an investment trust that invests in portfolios of private companies on a global scale. It currently has exposure to technology as well as biotech and consumer goods and services.  The trust sits on a discount to the underlying net asset value and has done so for a while. Over the past 12 months the discount has been as wide as 27.3% and as narrow as 11.7%. The discount is currently 15.3%. 

Lowcock notes: “The discount reflects the risks and challenges of valuing private equity. Private equity funds are generally suitable for long-term investors who want to add additional diversification to their portfolio, but you must be willing to take additional risks.

“Because they are investment trusts performance can be volatile, as with any liquid equity, and in the short term they will be correlated to the stock market. Likewise, downturns in the global economy or economic outlook could have an impact.

“In a weak economic environment private equity firms will find it harder to list their investments and are less likely to get a good price if they do.”

How two professional investors find investment trust bargains

Temple Bar

Value investing requires patience and nerves of steel, particularly following its worst decade on record. As a result, value-focused funds and investment trusts have in recent years underperformed rival funds, particularly those with a focus on quality growth businesses.

Temple Bar, managed by respected value investor Alistair Mundy, is no exception to the rule, having produced middling returns over the past five years. But interestingly, on a one-year view performance has picked up, with total returns of 18% versus 10% for the sector average, the AIC’s UK equity income investment trust sector.

Mundy targets out-of-form shares that he believes will recover their poise. Specifically, he sizes up businesses that have fallen 50% from their peak. In doing so, he is hoping to avoid ‘catching a falling knife’ or buying a cheap stock too early. 

As an additional safety check in order to try and avoid shares that are cheap for all the wrong reasons, Mundy considers the enterprise value of a business, which accounts for debt and pension liabilities. He then takes a view on how profitable the business could be in the future if it resolves its problems.

Lowcock notes: “Over the long term, investors have been rewarded by sticking with this strategy. The discount to net asset value is only 3%, but historically this fund has traded at a premium, only going to a discount in recent years.”

He adds that Temple Bar is also a reliable dividend payer. “The board is committed to paying a rising dividend every year and has met this commitment for the past 35 years.”

Why investment trust dividend heroes are set to continue their winning streaks

Schroder Income Growth Fund

This UK equity income investment trust’s main aim is to provide growth in the income it pays, and specifically in excess of the rate of inflation. It also seeks to deliver capital growth as a result of the rising income. The fund has a good performance record over the long term, and 2018 marked the 23rd consecutive year of dividend increases.

Lowcock notes: “The named manager is the talented and experienced Sue Noffke; she took over management in July 2011 and since then has executed a more diversified income stream, reducing concentration risk. She has widened the number of holdings to marginally north of 40 names, from around 30.”

The trust currently sits on a discount of 9%, wider than its 12-month average discount figure of 6.8%.

Earlier this year, Winterflood, the investment trust broker, noted the fund has a strong retail following, so its current discount is “correlated to retail investors’ appetite for UK equities.”

Sentiment towards UK equities and by extension UK funds and investment trusts could improve following the general election, particularly if the Conservative Party secures a majority. If and when investors do flock back to the UK market, the chances are that discounts will narrow for UK-focused trusts. 

This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.

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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