Investment trust discounts have been wide for a long time but following one of the most volatile weeks in equity markets since 2020 there could be some that have become even cheaper, according to Anthony Leatham and Markuz Jaffe, analysts at Peel Hunt.
Although volatility is “likely to remain elevated for some time”, investors buying trusts on wide discounts could reap the rewards of strong returns if markets correct. It also gives a margin of safety, as these trusts are already cheap so if markets fall there is not as far for these to drop.
But retail investors might need to be quick, as they are not the only ones hunting for bargains in the investment trust space. Rival companies or private investors are also on the prowl, the team noted, highlighting the examples of Canadian pension fund BCI, which has bid for BBGI Global infrastructure, as well as the cash offer for Harmony Energy Income Trust by Drax Bidco, a subsidiary of electric services company Drax Group.
“Both are timely reminders of the potential for corporate activity over the next 12 months to help compress the gap between public and private market valuations that has been evident since late 2022," the Peel Hunt team said.
Below, Leatham and Jaffe highlighted some of the biggest bargains investors may wish to consider. However, not every investment trust is a bargain, despite the generally wide discounts. As such, they also looked at the most expensive investment trusts that have not been swept up in the furore.
Cheap Trusts
Several equity trusts present discount opportunities. One of the standout examples is Herald Investment, which is currently on a 13% discount. It was recently thrust into the spotlight by US hedge fund Saba Capital, when the firm aggressively took stakes in discounted trusts and attempted a series of requisitions to remove board members and management teams and replace them with its own nominees. All of Saba’s attempts failed, including Herald.
The trust has performed well over the long term, with a first-quartile return of 44.2% in the IT Global Smaller Companies sector over the past five years. It is also the best in the sector over three and 10 years, although it has dropped to last place over 12 months.
One issue investors may have to consider is what Saba Capital will now do with its large stake in the trust. A key question will be if the hedge fund will remain invested or sell out, as this could cause the discount to widen further before it improves.
Other equity trusts on big discounts include Blackrock World Mining Trust and JP Morgan UK Small Cap Growth and Income trust, with a discount of 13% and 14%, respectively.
In the flexible investment space, RIT Capital Partners and Caledonia Investments also appeared on the team’s valuation screen. Currently, they have discounts of 32% and 36% with very similar investment approaches. Last month, Greetham said both represented opportunities and were likely “10 percentage points too cheap for their actual value”.
For the real bargain hunters, Peel Hunt noted some of the widest discounts could be found in private equity trusts. Five names stood out: Aumgnetum Fintech, Apax Global Alpha, Chrysalis Investments, Schiehallion Fund and Syncona, which have discounts ranging from 51% to 33%.
Responsible investment trusts were also under the spotlight, with the Peel Hunt team identifying “standout discounts” for trusts such as Greencoat UK Wind, Octopus Renewables Infrastructure and VH Global Energy infrastructure.
The corporate activity of BBGI and Drax Group also drew Peel Hunt's attention towards infrastructure trusts such as International Public Partnerships.
“In the case of International Public Partnerships, we see value with the share trading on a 25% discount and offering a yield of 7.7%, particularly in light of the progress across capital recycling, deleveraging, and share buybacks," the Peel Hunt team explained.
They added that the trust has recently committed to return £200m in capital to shareholders, up from the former target of £60m.
Expensive Trusts
However, not all investment trusts are screaming buys. Some are trading at high premiums, which means investors could get trapped in expensive options if they picked blindly.
The biggest example of this was 3i Group. The trust has delivered a top-quartile return over most periods, including a five-year performance of 512%, more than 400 percentage points above the IT Private equity average.
The Peel Hunt team said: “The c.60% premium to end-December 2024 net asset value [NAV] looks stretched, particularly as it continues to rely heavily on one very successful business – Action.”
It is not the only trust on a premium, with Majedie Investments having moved from a 12% average discount to a 2% premium following a change in management in 2023.
Elsewhere, several trusts appeared expensive to the Peel Hunt team due to substantially narrowing their discount. For example, in the UK, both Temple Bar and Shires Income have narrowed to a 3% discount.
Both have delivered a top-quartile performance in the IT UK Equity Income sector over the past year. However, Temple Bar has lagged over the long term, with bottom-quartile results over three years and third quartile over five years.
The other UK trust the Peel Hunt team identified was Alex Wright's Fidelity Special Values, which has dropped its discount to just 4%.
However, it has remained popular among experts, including Leatham, who said it benefited from the ongoing wave of mergers and acquisitions in the UK market.
“In alternatives, Pantheon Infrastructure has seen its discount narrow from a 12-month average of 24% to 19%, with a year-to-date share price total return of 9%, making it the best performing trust in the core-plus infrastructure sector”, the analysts added.
Other trusts to substantially narrow their discounts included REITs such as Life Science REIT, Supermarket Income REIT and Care REIT.