A trio of Black Friday investment trust bargains

The annual Black Friday sales event is upon us, with a host of retailers offering discounts on goods and services to attract custom and kickstart the festive spending season.

For investors, bargain-hunting is not just reserved for a week or so of the year – particularly for those who are fans of investment trusts.

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Investment trusts can trade at either a discount or a premium to their net asset value (NAV) due to shifting investor sentiment and market dynamics. When an investment trust trades at a discount, its share price is lower than the value of its underlying assets, presenting a potential bargain for investors. 

Conversely, a trust trading at a premium has a share price higher than its NAV, often driven by high demand or positive market perceptions. This see-saw effect of investor sentiment can be influenced by factors such as the trust’s performance, management reputation, and broader economic conditions, causing the market price to fluctuate above or below the actual value of the assets held.

The average investment trust discount across all sectors as of October 2024 was -14.8%, according to recent data from the Association of Investment Companies (AIC) – one of the widest average discount since the financial crisis in 2008.

How to approach discounted investment trusts

Myron Jobson, senior personal finance analyst, interactive investor, says: “As Black Friday ushers in a season of discounts and enticing deals, savvy investors can also find bargains in the investment trust market. Much like the retail bargains drawing crowds to stores, many investment trusts are currently trading at significant discounts to their NAV. That’s a measure of pessimism over investment trusts among investors at present.

“When it comes to discounted investment trusts, over long periods, they may make up some ground performance-wise as market perceptions improve, potentially offering a double benefit: an uptick in the trust’s underlying assets, but also the reduction in the discount.

“Whether you think the discount is warranted or overblown is down to what you make of it. It is important not to look at the discount in isolation. Assess the trust’s bargain credentials by comparing its current discount with its longer-term average - such as the past 12 months. If the discount is greater than the trust’s 12-month average, it could arguably be a good entry point.

“The key is to do your own research and then determine whether the discounted investment trust aligns with your risk appetite, time horizon, and broader portfolio.”

Top three discounted investment trust picks from ii’s fund analyst

Alex Watts, fund analyst at interactive investor, outlines three investment trusts on wide discounts that could experience a return to form performance-wise.

Fidelity Special Values (FSV)

Discount: -8.97%

“Fidelity Special Values Ord (LSE:FSV) offers a differentiated and contrarian approach to finding value opportunities across predominantly UK companies. Managers, Alex Wright and Jonathan Winton, have notable experience across UK PLC, especially across small and mid-cap businesses, towards which the trust biases.

“They take a bottom-up approach to identifying business with unrealised value with potential to recover and have proven capable of outperforming the benchmark All-Share and peers over various time periods. Recently, the trust has recovered well from the struggle of the first half of 2022 – a year of turmoil for small/mid-cap, while the large-cap heavy FTSE All-Share trod water. While capital appreciation is the main goal for the trust, the yield of around 3% is notable and makes for a smoothing of longer-term returns.

“While discounts on UK equity investment trusts are far from uncommon now, the current discount to NAV for FSV is perplexing. The discount of just under -9%, while not as drastic as some peers, is a fair divergence from the five-year average of around -4.5%. FSV is a popular and sizable trust that not uncommonly trades near to, or above NAV. Coupled with the board’s aim to at least protect the discount from double figures, this could be viewed as an attractive point for new investors to buy into an already undervalued portfolio.”

Pacific Assets (PAC)

Discount: -12.04%

“Pacific Assets Ord (LSE:PAC) Trust invests takes a long-term approach to investing in sustainable businesses across Asian markets. The focus is on selecting quality businesses with high standards of management and durable business models.

“The focus towards quality and sustainability has typically led management to find more opportunities across India, above other Asian countries. The trust has long been overweight India (41% of the portfolio versus 21% of benchmark index) and underweight China (just 9% compared with 31% of benchmark index). 

“The relatively defensive, quality-focused approach and lack of leverage has led to lesser drawdowns in periods of weak emerging market performance (such as through 2022). However, the widening discount, in tandem with the underweight to a Chinese market that rebounded through 2024, has seen the trust lag its benchmark and peer group through the past year.

“The current discount of just over -12% is uncommon for the trust when compared with the last 10-year average discount of around -5%.”

TR Property Trust (TRY)

Discount: -9.94%

“TR Property Ord (LSE:TRY) Trust takes a hybrid approach to investing in pan-European property securities and can allocate 15% to physical property. The listed portfolio is diversified across sectors and holds roughly a third in UK and two-thirds in Europe. Marcus Phayre-Mudge has managed the strategy for over 19 years and looks for strong management teams overseeing quality assets and healthy balance sheets. 

“The trust yields over 5%, far surpassing its benchmark, and has an impressive record of growing distributions year-on-year. TRY will on occasion pay distributions using revenue reserves, although this is prudently managed, and a healthy reserve is maintained to deal with potential earnings shortfalls. 

“Given property sector stress in 2022 and unremarkable performance for the listed European property sector year-to-date, the trust’s returns over three years are negative. However, TRY’s long-term track record is stellar, returning around 2% and 3% in excess of its benchmark over 10 and 15 years. 

“While narrower than most discounts of direct property peers, TRY’s discount of near -10% makes for relative cheapness versus its five-year average of nearer to -6%. Throughout its history, the trust is no stranger to trading at a small premium.

“With the property sector has been under a lot of pressure in recent years, an active and risk-managed approach is a good way to tap into the yield and potential upside for the sector.”

Note: discounts accurate to morning of 26 November 2024 (unless otherwise stated).