Interactive Investor

Discount Delver: the 10 cheapest trusts on 5 August 2022

5th August 2022 11:20

Kyle Caldwell from interactive investor

As part of a new series, we reveal the biggest investment trust discount changes over the past week.

Investment trusts, due to their closed- ended structure, offer investors the chance of picking up a potential bargain. Such an opportunity arises when a trust’s share price is lower than the underlying investments held by the trust (the net asset value, or  NAV).

However, a trust trading on a discount to NAV is not necessarily a buying opportunity. There’s likely a good reason why the trust is cheap, such as subdued short- or long-term performance, or poor investor sentiment towards how it invests.

As part of a new weekly series, interactive investor is highlighting the 10 biggest investment trust moves over the past week. We will publish this article every Friday, using data up to the close of trading the previous day.

In total, nearly 400 investment trusts have been screened, with the data sourced from Morningstar. Venture Capital Trusts (VCTs) have been excluded. We also strip out trusts with less than £20 million in assets. 

Over the past week, the biggest rating change is Seraphim Space Investment Trust (LSE:SSIT), which has seen its discount move from 20.2% to 30.5%. Launched last July, the trust invests in early and growth-stage space tech businesses. 

The trust defines the sort of companies it will hold as those “which rely on space-based connectivity or precision, navigation and timing signals, or whose technology or services are already addressing, originally derived from, or of potential benefit to the space sector”.

Since IPO the trust is down 31.6%. Its shares at the time of writing trade at 72p, having staged a rally over the past couple of weeks from hitting a record low of 49.8p on 15 July.

Over the past week, its shares have fallen from 81p to 72p, which has caused the discount to widen.

The second- and third-biggest movers were private trusts abrdn Private Equity Opportunities (LSE:APEO) and ICG Enterprise Trust (LSE:ICGT). High inflation and the market rotation towards value shares has negatively impacted demand for unlisted shares, which private equity trusts invest in.  

Elsewhere, it is interesting to see two renewable energy infrastructure trusts in the screen: Ecofin US Renewables Infrastructure and Harmony Energy Income Trust. Renewable energy infrastructure trusts have been in demand this year due to higher power prices following Russia’s war on Ukraine. In addition, some of the companies the trusts invest in have revenues protected by being linked to inflation. This has turbocharged returns, with the average trust in the sector up 15% over the past year.

However, it has been mixed fortunes for the two trusts that have seen their discounts widen notably over the past week. Ecofin US Renewables Infrastructure (LSE:RNEW) has seen its share price fall 15% since mid-July. In contrast, Harmony Energy Income (LSE:HEIT)’s share price has been stable in recent weeks, and is up 9.4% since its IPO last November.

Three UK trusts that specialise in mid-cap and small-cap stocks feature in the table, a reflection of how out of favour that part of the market is at the moment.

In addition, investor caution towards China is reflected by widening discounts for JPMorgan China Growth & Income (LSE:JCGI) and Baillie Gifford China Growth Trust (LSE:BGCG).  

Discount Delver: the 10 biggest discount moves over the past week 

Investment trust Sector Discount/premium change over past week* (%) Current discount (%)
Seraphim Space (LSE:SSIT) Growth Capital -10.34 -30.53
abrdn Private Equity Opportunities (LSE:APEO) Private Equity -7.30 -40.58
ICG Enterprise Trust (LSE:ICGT) Private Equity -6.27 -39.52
Ecofin US Renewables Infrastructure (LSE:RNEW) Renewable Energy Infrastructure -6.24 -10.09
Chelverton UK Dividend Trust (LSE:SDV) UK Equity Income -5.66 -4.97
Harmony Energy Income Trust (LSE:HEIT) Renewable Energy Infrastructure -5.59 -3.18
JPMorgan China Growth & Income (LSE:JCGI) China/Greater China -5.16 -5.04
Baillie Gifford China Growth Trust (LSE:BGCG) China/Greater China -4.68 -3.34
Aurora (LSE:ARR) UK All Companies -4.66 -8.72
Baillie Gifford UK Growth Trust (LSE:BGUK) UK All Companies -4.10 -12.77

Source: Morningstar. *Data from close of trading 28July 2022 to close of trading 4 August 2022. Past performance is not a guide to future performance.

Of course, in the case of any investment trust discount, further homework is required. Among the things to consider are the prospects for the trust going forwards. Ultimately, investors will need to have a positive view of how the trust invests. 

In some cases, large discounts can be a more permanent feature for trusts due to a lack of investor appetite for shares and a lack of share buybacks by the board.

Trusts with a low profile, or those that invest in a specialist area of the market, can also persistently trade at discounts to NAV. Such trusts tend to fly under the radar of many investors. With demand low, these trusts tend to persistently trade on a discount. 

In general, investment trusts have a greater tendency to converge to their mean discount rather than the value of their underlying investments. Therefore, it is useful to consider the current discount versus history, and take a view over one, three and five years.

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.