A trio of new investment trusts will back British shares, but big discounts are on offer for existing UK trusts.
It had been a quiet year for investment trust launches, but over the past month or so, the space has sprung to life with a total of five trusts seeking to list on the stock market.
Three of the trusts are raising money to invest in the UK stock market, which has for the past year or so been notably out of favour among retail investors.
In early September, the first to announce its intention to launch was the Tellworth British Recovery & Growth Trust (TBRGT). At the helm of the trust, which is seeking to raise £100 million, will be Paul Marriage, John Warren and Johnnie Smith of Tellworth Investments. Marriage and Warren are former star managers at Cazenove Capital and Schroders, where they ran UK smaller companies and long/short strategies.
The three types of businesses this “Best of British” trust will focus on are: UK companies well-positioned in global markets, UK firms with high levels of intellectual property, and UK companies undergoing significant strategic change, which the managers believe are trading at a discount to intrinsic value.
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A couple of weeks after its announcement, Tellworth now finds itself with plenty of competition during its fundraise. In late September, the Buffettology Smaller Companies investment trust (BSCIT) and Schroder British Opportunities both announced plans to launch.
BSCIT is looking to raise £100 million and will be managed by Keith Ashworth-Lord, manager of CFP SDL UK Buffettology, one of interactive investor’s Super 60 funds. It will follow the same business-perspective investing approach in which Ashworth-Lord looks, among other things, for businesses with an enduring franchise that have pricing power and an economic moat. But the differentiator between this proposed new trust and the current fund is that the trust will be focusing purely on smaller companies – those with a market capitalisation of less than £500 million. The trust will typically hold between 30 to 50 names.
“The structure of a closed-ended investment trust, rather than an open-ended fund, means that many of the liquidity concerns over investment in smaller quoted companies can be addressed,” says Ashworth-Lord. “The investment trust structure (and permanency of capital) should ensure that we can take a genuinely long-term investment perspective, thus reducing liquidity risk to the portfolio.”
Completing the trio is the Schroder British Opportunities Trust. Schroders points out that British businesses need funding now more than ever to ensure their growth through the pandemic and beyond. The trust, which is seeking to raise £250 million, will focus on small and medium-sized UK companies with sustainable business models. It will be managed by Rory Bateman, head of equities at Schroders, and Tim Creed, head of UK and European private equity. The trust will invest in both public and private businesses.
“This is a once-in-a-generation opportunity to invest in the future of British business and produce substantial returns while making a positive impact,” says Bateman. He adds: “The companies that require funding are often too large to be the focus of government initiatives, but too small to have the necessary impact with banks or credit markets. The current level of UK government debt-driven support is unsustainable and as support comes to an end, we believe many high-quality UK growth businesses will require an injection of ‘fresh’ equity to grow and succeed through the pandemic and beyond.”
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Bag a bargain instead?
The three proposed trust launches view the unloved UK market as a good entry point for long-term investors. As we have previously reported, retail investors have been shying away from UK funds and trusts owing to the dividend drought and continued uncertainty over Brexit and Covid-19.
While from a valuation standpoint certain parts of the UK market look cheap versus history, there is one notable downside at present for investors considering a new UK growth trust versus an established name.
The downside is that all nine existing UK growth trusts are trading on discounts, handing investors the chance to buy the cheap UK market at an even cheaper price.
Three trusts, as at 5 October, are trading on discounts in excess of 15%, according to Winterflood: Artemis Alpha Trust (LSE: ATS), a discount of 20.9% versus 16.5% for its 12-month average; Keystone (LSE: KIT), a discount of 17.3% versus 15%; and Henderson Opportunities (LSE: HOT), a discount of 17.1% versus 17%.
Out of the remaining six, Fidelity Special Values (LSE:FSV) catches the eye. The value-focused portfolio is currently trading on a discount of 10.9% versus 2.8% for its 12-month average.
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