The sell-off in technology and private equity trusts is presenting opportunities for brave bargain hunters.
A key characteristic of investment trusts is that the price of the shares can diverge from the net asset value (NAV) of a portfolio’s assets. This means investors can pick up bargains by buying trusts that are trading at unjustified or uncharacteristic short-term discounts.
With the 5 April ISA deadline fast approaching, now is a fantastic time for brave investors to make the most of discount opportunities.
One way to identify bargain trusts is to look at their discount today compared with the typical discount over one, three and five years. So-called z-scores show if a trust is truly cheap relative to its history, rather than just trading at a discount – which may be a very common circumstance for a trust.
Under this metric, a positive z-score shows the current value is higher than the mean, while a negative value indicates the opposite. As a rule of thumb, a z-score of minus 2 or lower suggests the trust is looking cheap, while a positive score of 2 or more suggests it looks expensive.
While a trust may be cheap for a good reason, this analysis method does throw up investment ideas that are worth investigating further. As always, further analysis needs to be carried, including investors taking a view on whether the trust’s discount is justified or cheap for a good reason.
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These are some of the biggest bargains available among large and popular investment trusts. Discount and performance is correct as of 24 March 2023, and sourced from data firm Morningstar.
All nine investment trusts stated below have a negative z-score of more than 2 over either three or five years, or both those time periods. In addition, the current discounts are wider than a year ago, notably so in many cases.
Once Britain’s largest investment trust by market cap, the “growth” investment specialist from Edinburgh-based fund manager Baillie Gifford has fallen on hard times, as higher interest rates have caused investors to prioritise profits today over profits tomorrow. Investors are also concerned about its exposure to private companies, currently at its 30% portfolio cap, and their true valuations if they were to raise new money or list their shares on the stock market.
Scottish Mortgage trades at a 19% discount, compared with an average discount of 7.5% over the past 12 months. Compared with its average five-year discount, the Super 60 trust is the seventh-cheapest trust out of the entire investment trust universe on the z-score measure because it often traded at a premium in the past.
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Short-term performance is poor, with shares falling 42% over the past two years, but over 10 years it is still the best-performing global trust, with a 330% return. A return to form for growth shares, which could be triggered by falling interest rates and inflation, would be a catalyst for Scottish Mortgage shares to bounce back.
Baillie Gifford US Growth
Baillie Gifford US Growth (LSE:USA) has a similar investment approach to Scottish Mortgage, and holds many of the same stocks, such as Elon Musk’s SpaceX and Tesla, as well as Amazon and Nvidia. It trades at a 22% discount, and its average 12-month discount has been 18%.
Its discount has therefore not widened as much as Scottish Mortgage’s has this year, but it does have a wider discount than its big brother trust. This could be linked to its higher allocation to private stocks, at 35.2% compared with 29.9% for Scottish Mortgage.
For investors who back Baillie Gifford’s ability to spot the next generation of winning companies in emerging fields such as artificial intelligence and healthcare, now could be a good time to pick up discounted trust shares.
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However, the hangover from the technology boom and bust caused by ultra-low interest rates could last years as market conditions normalise.
Private equity trusts are battling the same headwinds as Scottish Mortgage and Baillie Gifford US Growth Trust. While they update the values of their portfolios four times a year, based on company performance as well as public and private market comparisons between similar companies, investors are sceptical about strong private market valuations.
This has led to a 26% discount opening up at HgCapital Trust, versus a 16% average 12-month discount. Before November 2022, when the technology sector began to fall, HgCapital traded around par for more than a decade. A 26% discount is therefore extremely rare.
HgCapital Trust is one of the strongest-performing investment trusts of the past 20 years. Its share price compound annual growth rate has been a remarkable 17.9% until the end of 2022, while for the past decade the figure is 16.3%. It owns boring but essential business software and service firms.
On an even wider discount is private equity trust Pantheon International, at 48%. It’s been at a 41% discount on average for 12 months. Long term it has been a fantastic performer, returning 12.3% a year in net asset value gains since 1987, after paying fees to the fund manager.
It buys private companies directly, but also invests in other private equity funds. It largest investment sectors are healthcare and technology, sectors the trusts says are being propelled by underlying themes such as digitisation and automation; ageing demographics in developed markets; and the increasing demand for high-quality healthcare products and services.
HarbourVest Global Private Equity
Another private equity trust on a huge discount is HarbourVest Global Private Equity. At a 51% discount, it is even cheaper than HgCapital and Pantheon International relative to its net asset value. Its average discount over 12 months is 42%.
The trust owns more than 1,000 private companies, including Chinese e-commerce firm Shein, which is a 2.3% position, and design software group Figma, at 0.7%.
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Numis, the broker, is a fan of HarbourVest, Pantheon International and HgCapital. It said: “Despite resilient net asset values, private equity investment trusts are trading on wide discounts. This highlights that investors have little faith in the valuations and are expecting further falls given equity market volatility.
“Ultimately, we do not agree and expect NAVs to be more resilient than investors expect. The nature of businesses is more resilient than equity markets, given low exposure to cyclical sectors (little exposure to commodities, high street retail) and a focus on defensive, cash-generative businesses with high levels of recurring revenues, such as software and education. That said, HarbourVest and Pantheon do have exposure to venture/growth investments, which is where we would expect to see more valuation volatility.”
RIT Capital Partners
Another victim of negative sentiment to private equity has been RIT Capital Partners, the trust backed by the Rothschild banking dynasty. It has 39% in private stocks, and now trades on a 22% discount. Just three years ago it traded at par, and its averaged discount over the past 12 months has been 9.5%.
Despite poor recent performance, long-run returns are strong. Since listing on the London Stock Exchange in 1988, RIT has generated a share price total return of 11.2% a year for its shareholders.
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Numis remain supporters, highlighting that now is an attractive time to buy. However, rival analysts Investec recently downgraded from ‘hold’ to ‘sell’ on the grounds that the risk profile of the trust “has been radically transformed in recent years” due to the exposure of its unlisted stocks increasing.
International Public Partnerships
One of the cheapest trusts relative to its five-year average discount is International Public Partnerships, the high-yielding infrastructure trust.
Its 10% discount is extremely rare, having traded at a 5% premium on average for the past year. The trust currently yields 5%, generating an income from the ownership of infrastructure projects, such as sewer networks, energy grids and gas pipelines. It owns projects across the world, including in Europe, Australia and America.
The trust’s share price has been under pressure due to rising interest rates. As yields rise on bonds, investors can lock in higher yields, which provides greater competition to IPP.
Another trust hurt by rising interest rates has been Warehouse REIT, which now trades at 37% discount, versus a 18% discount on average over the past 12 months. It yields 7% by generating an income-leasing warehouse space to corporate clients, such as online shopping companies.
Investors have punished it as they can now get higher yields from bonds, but also because companies are demanding less warehouse space as the online shopping boom has slowed since the end of the pandemic.
Trading at a 9% discount, and on average a 7% discount over the past year, global stocks trust Bankers has been a strong long-run performer. Over the past 20 years, it has returned 677% compared with 565% for the MSCI World index.
Nevertheless, investors can pick up shares in this £1.2 billion trust, managed by Alex Crooke and Mike Kerley, at a discount. It yields 2.4% and has a total expense ratio of 0.58%.
The trust invests in both growth and value shares, according to Morningstar, with a bias towards large companies, making it a strong core global stocks holding. It currently holds 179 companies.
Nine of the biggest bargains available among large and popular trusts
|Trust||Fund size||Association of Investment Companies sector||12-month average discount (%)||5-year Z-score||Current discount (%)|
|HarbourVest Global Private Equity||3,204,528,237||Private Equity||-42.33||-2.41||-50.63|
|Pantheon International||2,441,666,471||Private Equity||-41.47||-2.24||-48.55|
|Warehouse REIT||637,717,336||Property - UK Logistics||-17.72||-2.89||-37.05|
|HgCapital Trust||2,069,390,548||Private Equity||-16.20||-2.31||-25.72|
|RIT Capital Partners||3,760,679,472||Flexible Investment||-9.55||-2.46||-22.37|
|Baillie Gifford US Growth||548,687,954||North America||-13.75||-2.75||-21.95|
|International Public Partnerships||2,932,420,337||Infrastructure||4.94||-2.74||-10.25|
Source: Morningstar, 23 March 2023. Past performance is not a guide to future performance.
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