There are fewer bargains or wildly expensive trusts to be found among US investment trusts versus the UK and Global sectors, with only two trusts veering wildly from the five-year average premium/discount.
Trustnet continued its look at which investment trusts had diverged at least 5 percentage points off their five-year average premium/discount, this time looking at the IT North America and IT North American Smaller Companies sector.
The study previously looked at the major UK and Global sectors, which both had more extremes overall than their American cousin.
Data provided by QuotedData showed just one trust per North American sector met this criteria: Baillie Gifford US Growth Trust and Brown Advisory US Smaller Companies.
Source: Quoted Data
The US market has been strong over the past decade, particularly the large-caps, where the technology and growth biases have produced the best returns out of any market.
Performance of indices over past 10 years
Source: FE Analytics
Jayna Rana, investment companies analyst at QuotedData, said that when the pandemic took hold last year investors turned to growth stocks, seeking comfort in what had made the best returns in recent history.
In the IT North America sector the only trust flagged was the £1.1bn Baillie Gifford US Growth Trust, which is currently on a 2.4% discount, a 5.5 percentage point downgrade on its long-term 3.1 premium, offering investors an opportunity to pick up the trust at a rare discount.
The trust was the only one in the sector to run on a premium over five years, but it dropped down to a discount in September, catalysed by macro and stock specific events.
“More recently, investors have been taking profits on growth stocks, which has likely weighed on the discount,” Rana said.
But the emergence of a new Covid variant, Omicron, could “refocus” investor’s attention on growth again, causing the Baillie Gifford US Growth Trust’s discount to narrow or even return to a premium, Rana said.
The other catalyst has been a pull back on two of the trust’s biggest holdings: Tesla and Moderna. Tesla’s downgrade was trigger by its founder, Elon Musk, asking his 3.5m Twitter followers if he should sell 10% of his shares in the electric car company in early November, causing the share price to drop 12%.
Moderna’s downgrade started last month when the company reported it had fallen short on profit and sales expectations for the third quarter and it was not on track to meet the shipping quota of vaccines for the year, wiping 20% off the share price. The stock took another hit yesterday after Stéphane Bancel, the chief executive, told the FT that existing vaccines will struggle against the Omicron variant.
The trust has made the best returns in the sector over three years, totalling 192.3%, more than double the sector average (69.7%). But performance has dropped to the fourth quartile in the past 12 months due to value leading markets, a style the trust does not subscribe to.
Moving onto the IT North American Smaller Companies sector, Brown Advisory US Smaller Companies was the only trust where the share price had diverged at least 5 percentage points off its five-year average. It is now on a 4.1% discount, narrowing its long-term discount by 5.2 percentage points.
This re-rating has been caused by a new manager and strategy being put in place. Chris Berrier took over from veteran manager, Robert Siddles, who ran the trust under the Jupiter banner until March this year.
Matthew Read, senior analyst at QuotedData, said that although Siddles ran the fund with a tilt towards growth, he had a strong focus on capital preservation which had given the trust a “value flavour”. Value had been inherently out of fashion in markets over the past 10 years and this had weighed down the trust’s discount toward the end of Siddles’ tenure.
“Plus during 2020, the market woke up to the fact that the trust’s then chairman, Gordon Grender, had been on the board for nearly 28 years, which also weighed heavily on the discount,” Read said. The longer a chairman or board member is at the helm, the more concern that they have become aligned to the manager, rather than shareholders.
The appointment of a new manager and board member have been positive changes for the trust and analysts noted improvements to the portfolio.
Kepler analysts said the trust’s ability to outperform the sector since Berrier took over “despite choppy markets” meant it was a “great opportunity to get access to a premium strategy in an area of high growth potential on a small discount to NAV[net asset value]”.
The only other trust in the sector is the JPMorgan US Smaller Companies. Its discount also narrowed compared to its five-year average, 0.9% today versus 2.8% long-term.
The trust has lagged its Brown Advisory peer in 2021, returning 38.3% versus 42.1%, but this did not deter Kepler analysts’ positive outlook on the fund.
Analysts at the research firm said that, while past performance should never guide future returns, they were reassured by the trust’s good long-term performance and saw it as evidence that the quality process could outperform through various market cycles.
Indeed over 10 years it has made a total return of 442.2%, outperforming its benchmark (316.1%).