Where are analysts and professional buyers finding value among the large number of investment trust discount opportunities?
Discounts across the sector have been hovering at levels not seen extensively since the 2008 financial crisis – so there are clearly opportunities for canny bargain-hunters to capitalise on.
But as Nick Greenwood, manager of MIGO Opportunities Trust (LSE:MIGO), observes, it’s important not to focus exclusively on price. For private investors, therefore, additions to brokers’ buy lists – where the analysis has been done by experts – can be a valuable source of new ideas, particularly where they are highlighted specifically as offering good value.
Numis recently picked out a couple of new buy tips for its list in the shape of Odyssean Investment Trust (LSE:OIT) and AVI Japan Opportunity (LSE:AJOT), with the latter in particular standing out as a cheap pick for exposure to a cheap market.
The broker points out that after decades of disappointing returns, deflation, muted investment and difficult demographics, Japan is finally seeing 4% inflation. As a consequence, consumption and investment are picking up, while rising wages are expected to “act as a catalyst for increased innovation and productivity”.
Meanwhile, valuations remain very low, with the Japanese market trading at the cheapest rate of all major markets, and significantly below its 10-year average.
Numis singles out AVI Japan Opportunity (AJOT) as an interesting and successful way to access the market: “[It] benefits from a manager with a long-term record from value investing through AVI Global, and has been investing in Japan for many years.”
Manager Joe Bauernfreund runs a concentrated portfolio of just 20 to 30 holdings that are viewed as trading at a discount to their intrinsic value, but focuses on quality to avoid ‘value traps’. He then aims to unlock that value as an engaged investor.
“AJOT has frequently traded on a premium, although the shares have recently widened to a 5% discount, which offers value in our view,” Numis adds.
- Fundamentals: five reasons why investment trusts are different from funds
- 12 investment trusts for a £10,000 annual income in 2023
- Delving into the dividend: nine income trusts delivering top total returns
Odyssean Investment Trust’s manager Stuart Widdowson also operates a concentrated portfolio, in this case of UK smaller companies – “an unloved and cheap asset class,” as the broker points out.
He homes in on companies that are out of favour and trading at discounts to intrinsic value, takes a substantial stake and then engages actively to help them turn their fortunes around through management, operational or strategy changes.
It’s an approach described as a private equity-style approach for public markets, and it has proved very successful. Since listing five years ago, OIT has returned over 10% a year, against 0.6% a year for the benchmark NSCI ex ICs inc AIM index.
Numis makes the point that even in the turbulence of 2022, when smaller companies were being sold off indiscriminately, it achieved returns of 5.9%. “The NAV has also been less volatile than both its benchmark and the FTSE All-Share, despite the concentration of the portfolio,” the broker says.
Shares have fluctuated recently between discount and premium, particularly given a rather bumpy first quarter of 2023, but Numis is not the only commentator to see OIT as an attractive long-term core addition to investors’ portfolios.
Andrew McHattie, publisher of the Investment Trust Newsletter, says: “We can see why the trust is highly rated and do not expect it to lose its current standing unless there are unforeseen problems.”
- Funds and trusts four professionals are buying and selling: Q2
- Investment trust boards: what do they do, and do they add value?
- The eight income investment trust heavyweights: how sustainable are the dividends?
Elsewhere, Nick Greenwood is finding discount opportunities in the green energy space for his fund of undervalued investment trusts.
He points out that until recently many renewables trusts were trading at sizeable premiums, but says: “Rising gilt yields and the announcement of a revenue cap for renewable energy generators saw the sector endure steep declines last year.
“We believe this merely represents a short-term share price fluctuation, as the structural trends driving long-term growth in renewables remain robust.”
With that in mind, he has invested in Aquila European Renewables (LSE:AERI), which runs wind and solar projects across Iberia, Greece and Scandinavia and is currently trading on a 15% discount. Greenwood sees “multiple catalysts for change and long-term growth potential”.
In the same arena, McHattie picks out Premier Miton Global Renewables Trust (LSE:PMGR) as a “punchy" option that is currently trading on a relatively wide discount as the renewables sector average has widened.
The trust positions itself as a ‘one-stop shop’ for exposure to this area, holding shares in a range of renewable energy generation companies and investment trusts, rather than investing directly in the infrastructure.
These positions include “both high-yielders and developers, plus companies operating in areas necessary for the delivery of energy such as energy networks, battery storage, and other areas of renewables infrastructure such as offshore wind turbine installation vessels”.
Familiar names such as Greencoat UK Wind (LSE:UKW) and Octopus Renewables Infrastructure (LSE:ORIT) feature alongside less well known and international operations, providing diversification across different geographical areas, types of power generation, and risks.
On a 14.1% discount, McHattie believes the trust looks attractive, in part because it is very small at only just over £30 million of assets and there is a continuation vote coming up in 2025.
“We think that if the trust continues to trade on a discount, shareholders may well decide to call time and roll over into an open-ended structure, so there is a decent chance here of some sort of corporate action on top of what appear to be very solid investment foundations,” he observes.
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.
Peter Spiller: ‘embarrassing’ discount will close soon and reward long-term investors