UK smaller companies trusts are collectively trading at the widest discount as some areas of the UK, long hit by Brexit and by more recently Covid, slowly start to enjoy the global recovery.
Discounted investment trusts can offer investors a useful entry point at gaining exposure to companies at a lower rate than the net asset value (NAV).
Trusts can trade at a discount for a multitude of reasons, but it can be a buy signal because if sentiment improves the discount can narrow and investors can realise enhanced gains.
Conversely, if a trust trades on a premium it can be an indication the trust is expensive and there is a risk the premium could fall.
Using data from FE Analytics, Trustnet has looked across the main AIC sectors to discover which trusts are currently trading on the widest discounts. Those without recent discount figures have been excluded – although most updated on 7 May.
Investment trusts trading at the widest discount in 2021
Source: FE Analytics
The biggest discount appears to be on the £62.5m Marwyn Value Investors trust, which was trading at a discount of 36.79 per cent as at 23 April. As of 11 May, it had barely moved with a discount of 36.1 per cent, according to the AIC website.
The trust, which sits in the IT UK Smaller Companies sector, has consistently traded on a discount wider than 20 per cent discount over the last five years; it went as low as near 50 per cent discount after the coronavirus sell-off in March 2020.
This can perhaps be explained by the highly concentrated nature of the holdings, with Zegona Communications occupying a 36.09 per cent stake in the portfolio.
The share price of Zegona Communications hit a high in 2017 and has since struggled with fluctuations.
Marwyn Value Investors’ discount over 5yrs
Source: FE Analytics
In second is the $760.4m Canadian General Investments trust, which was trading on a 32.3 per cent discount to NAV as of 7 May. Its discount has hovered around a 30 per cent average for the past five years, according to Shore Capital.
The trust – which is domiciled in Canada, has outperformed the IT North America sector over the past one, three and five years. Over the past 12 months, its 79.07 per cent total return is significantly ahead of the 49.38 per cent made by its average peer.
Analysts at Shore Capital explained why the discount remains high: “One of the key discount management tools used by most funds, a buy-back or tender offer, is not a possibility for Canadian General Investments given the fund’s investment corp status, which eliminates a layer of taxation, with capital gains only being taxed at the shareholder level.
“We believe that a steady/growing dividend should boost the attractiveness of the shares and could lead to some contraction in the discount.”
From the IT Environmental sector, the Menhaden Plc Trust has the third highest discount at 29.06 per cent.
The £82.4m trust is managed by Luciano Suana, Ben Goldsmith and Graham Thomas invests in businesses that are demonstrably delivering or benefiting significantly, from the efficient use of energy and resources, irrespective of their size, location or stage of development.
Within UK equities, another two smaller companies trusts on the list are £68.2m Crystal Amber Fund Limited and £6m SVM UK Emerging, trading at discounts of 27.1 and 25.25 per cent respectively.
SVM UK Emerging has significant exposure to industrials and consumer discretionaries which are expected to perform strongly in the UK recovery.
Additionally, the fund holds venture capital firm Draper Espirit, a favourite of the UK small-cap space.
Draper Espirit has invested in companies such as Graphcore, TransferWise and Trustpilot and offers exposure to unlisted names.
Manager Margaret Lawson said: “The fund focuses on businesses with pricing power which we believe will be able to pay up for their inputs and raise wages.”
Furthermore, the global shift towards electric vehicles and renewables is likely to bring a structural increase in demand for copper and other commodities, and this is reflected in its investments in clean energy, including Ceres Power and ITM Power.
Performance of UK Smaller Companies trusts vs sector over 5yrs
Source: FE Analytics
There are three other IT UK Smaller Companies trusts that are trading on a significant discount to NAV.
The £1.8m Chelverton Growth Trust, run by David Horner and David Taylor, published a discount of 20.29 per cent on 31 March.
The trust invests in companies which are believed to be at a “point of change”.
Manny Phol’s £5m Athelney Trust and £39.8m Downing Strategic Micro-Cap are trading on discounts of 19.77 and 14.61 per cent respectively.
Of all of those UK smaller companies trusts, only SVM UK Emerging has managed keep up with its sector and until recently was outperforming its average peer.
Over five years, three of the trusts made a loss and Crystal Amber Fund posted a loss of 53.78 per cent.
SVM UK Emerging has performed well over five years despite being in an unloved and undervalued market, but is now as trading on one its widest discount in three years.
Finally, the trust with the highest level of gearing in the list is the £111m Middlefield Canadian Income Trust, which is currently 23.85 per cent geared.
This marks quite an increase from 15.3 per cent in January and perhaps speaks to the level of opportunity the manager has seen in Canada by adding capital to the current holdings.
It is trading at a discount of 14.19 per cent to NAV and has a yield of 4.8 per cent.