Fund Focus: are these ‘expensive’ trusts worth the money?

Another week, another big investor bemoaning the “deep and persistent” discount on an investment trust’s shares.

In this case it’s the activism-minded AVI talking about HarbourVest Global Priv Equity Ord (LSE:HVPE), but such concerns are pretty common among professional investors.

While there is more nuance to AVI’s particular grievances I am generally less bothered about discounts than this particular crowd, given that it’s possible to enjoy strong share price returns regardless of the gap with NAV. Discounts also give us a ‘cheaper’ way in, and potentially offer a margin of safety.

What I would worry about more is that less widespread phenomenon: the investment trust premium. Because if some appear justified, they leave a long way for the price to fall should a trust stumble or shareholders lose some of their zeal.

What history tells us

We’ve seen such rise and fall stories plenty of times in the past.

Lindsell Train Ord (LSE:LTI) reached a fairly wild 100% premium in 2019, leaving shares vulnerable when it later embarked on a run of bad performance. Had you invested money at the start of 2020, at around the peak of the hype, you would currently be sitting on a loss of around 30%.

There’s also the infrastructure (and renewable energy infrastructure) space, where names like HICL Infrastructure PLC Ord (LSE:HICL) comfortably traded on double-digit premiums on the back of their reputation for stable income – until rate rises (and higher bond yields) sent shares crashing in around 2022.

Growth funds with fashionable themes shared a similar fate - as we saw with Seraphim Space Investment Trust Ord (LSE:SSIT), which has recently returned to market darling status.

This is not to say premiums are never justified, but a good number of trusts currently command such valuations. Our table shows some of the most 'expensive' names, and it's worth at least understanding what's behind these bumper price tags.

From private equity to space (and Russia)

I won’t dwell on them too long but it’s hard to ignore Seraphim Space and 3i Group Ord (LSE:III). 3i’s premium came to around the 60% mark last year and was based on the trust being the sole way to invest in the (high growth) European discount retailer Action. Softer expectations for Action have knocked the premium back a bit in recent months.

Seraphim’s premium does have lots going for it: two big secular growth themes in the form of space exploration and defence, as well as the prospect of holdings (especially top name ICEYE) listing their shares. But such a valuation still creates vulnerability.

An unusual case also sits at the top of the table, in the form of JPMorgan Emerg EMEA Sec Plc (LSE:JEMA).

The fund wrote down the value of its Russian holdings at the onset of the Ukraine war, and its board believes the enormous premium stems from "the uncertainty of what value if any should be attributed to the Russian assets". Such value is not at all guaranteed, but the pricing suggests some investors are optimistic on this front.

Income, income, income

If we look at other premiums there’s a faint echo of what happened with infrastructure trusts a few years ago, with investors paying up for what they regard as reliable income.

Leading dividend hero City of London Ord (LSE:CTY) tends to have a small premium, even if its yield isn’t the biggest, while higher-yielding Aberdeen Equity Income Trust (LSE:AEI) is similar (if not in the table, which offers a top 10 of sorts).

Turning to another market Henderson Far East Income Ord (LSE:HFEL), which comes with a fat yield, sits on a 4.6% premium.

And to go more niche we see lots of debt funds, including CQS New City High Yield Ord (LSE:NCYF), TwentyFour Income Ord (LSE:TFIF), M&G Credit Income Investment Ord (LSE:MGCI) and Invesco Bond Income Plus Ord (LSE:BIPS), on premiums.

A problem here is that, like any investment, the funds mentioned above of course have potential weaknesses.

The debt funds can be complex and focused on quite esoteric assets, and could run into idiosyncratic risks of their own.

Names like City of London could certainly suffer if the UK market falls back out of favour, while Henderson Far East Income already poses a headache to investors via some slightly underwhelming total returns.

The good news is that in most cases the premiums on show are modest enough. 

But investors could still weigh up alternatives with a less demanding price tag. Plenty of funds have captured the resurgence of the UK market, while a good number are as focused on steady income payments as names like City of London.

The table shows that investors are also paying up for outright strong performance and distinctive investment approaches, be it in emerging markets or UK smaller companies.

The question, again, is whether funds are doing something different enough to warrant such a valuation.