River and Mercantile UK Micro Cap, India Capital Growth and Aberdeen Smaller Companies Income Trust are among the five FE Crown-rated investment trusts that are trading at a double-digit discount but have delivered the best returns over three years, according to research by FE Trustnet.
Being on the secondary market means investment companies can sometimes trade at a discount to the underlying value of their holdings andt thatfigure will vary depending on sentiment towards the trust.
As a result, investors who buy at a discount can benefit if it later narrows when the share price rises, although they can also suffer losses should it widen further if the trust’s shares go down.
Below, FE Trustnet takes a closer look at the best performing investment trusts that hold the maximum number of FE Crowns but are trading at double-digit discounts to their net asset value (NAV).
VinaCapital Vietnam Opportunity
Trading at a discount of 19 per cent to its NAV is the £706.0m Vina Capital Vietnam Opportunity trust, which is managed by Dom Lam.
It focuses on cyclical investments and provides multi-asset exposure to Vietnam’s economy. Its ability to invest across a range of asset classes provides the closed-end vehicle with exposure to parts of the economy that can’t be accessed via listed stocks, in particular, domestic consumption and infrastructure.
Performance of fund over 3yrs
Source: FE Analytics
According to research firm Numis, the fund’s NAV returns in 2017 of 32.1 per cent lagged the Vietnam Index return of 48.4 per cent (in dollar terms), reflecting the drag from a relatively large cash balance and receivables.
However, Numis noted that the trust’s recent investment of the excess cash suggests there is scope for further uplifts in the private equity portfolio, which it said “tends to lag movements in quoted markets”.
The trust’s ability to take advantage of Vietnam’s economic growth, young population and middle class’ expansion make Vina Capital Vietnam Opportunity “a compelling investment”, added Myrto Charamis, research analyst at Liberum.
Over three years, VinaCapital Vietnam Opportunity has delivered a total return of 118.86 per cent compared with a 56.56 per cent gain for the average IT Country Specialists Asia Pacific trust, as the above chart shows.
VinaCapital Vietnam Opportunity has ongoing charges of 4.44 per cent and yields 2 per cent. It is not geared, according to figures from the Association of Investment Companies (AIC).
Riverstone Energy
The £1bn Riverstone Energy trust is the second on the list of best performing five FE crown-rated investment trusts that have a double-digit discount to their NAV.
Run by investment manager Riverstone Energy Limited, the trust aims to achieve risk-adjusted returns through investing in the exploration and production, credit and midstream energy sectors.
The team behind the strategy manages the closed-end portfolio with a focus on identifying companies that operate in low-cost basins, are run by strong management teams and have conservative capital structures. Research house Winterflood said these features could help the fund “withstand short-term fluctuations in commodity prices”.
Last February, Riverstone Energy sold its holding in Three Rivers III, a transaction that represented a gross multiple of invested capital of 2.2x on its $94m investment and a gross internal rate of return (IRR) - used to evaluate the attractiveness of an investment - of 49 per cent.
Over three years, Riverstone Energy has delivered a total return of 15.06 per cent compared with a 19.94 per cent gain for the average IT Commodities and Natural Resources investment trust.
Performance of fund over 3yrs
Source: FE Analytics
Riverstone Energy Limited is currently trading at a discount of 20.9 per cent of its NAV, has ongoing charges of 2.10 per cent and is not geared.
River and Mercantile UK Micro Cap
River and Mercantile UK Micro Cap, overseen by recent-appointed manager George Ensor, is the next closed-end strategy on our list.
The company aims to achieve long-term capital growth from investment in a diversified portfolio of UK micro-cap companies, typically comprising companies with a free float market capitalisation of less than £100m at the time of purchase.
Prior to Ensor, the closed-end strategy had been run by Philip Rodrigs, whose departure led to the company’s share price moving from an 11 per cent premium to a 12 per cent discount in a two-week period.
Regarding Rodrigs’ departure, Winterflood said: “River and Mercantile UK Micro Cap has performed strongly since its launch both in relative and absolute terms and has significantly outperformed its nearest peers.
“We believe that there is a large opportunity in the micro-cap segment of the UK market for a genuinely active manager to add considerable value through stock-picking.
“While Philip Rodrigs’ recent departure was an unexpected and disappointing development, River and Mercantile is understandably keen to stress the continuity that George Ensor, his replacement as manager of River & Mercantile UK Micro Cap, provides and the consistency that the PVT investment approach offers.”
The trust is overweight technology, oil & gas and healthcare stocks with biggest holdings including Blue Prism, Taptica, Frontier Developments, MaxCyte and SDX Energy.
Over five years, the trust has delivered a total return of 72.91 per cent compared with a 63.81 per cent gain for the average IT UK Smaller Companies member.
River and Mercantile UK Micro Cap is trading at an 11.8 per cent discount to its NAV, has ongoing charges of 1.28 per cent and is not geared.
India Capital Growth
Another investment trust that is trading at a double-digit discount and holds the maximum of FE Crowns is India Capital Growth, which is managed by Ocean Dial Asset Management.
Although overseen by David Cornell, Ocean Dial head of equities Gaurav Narain has looked after stock selection since late 2011.
Narain is based in Mumbai and is helped by a team of locally based of analysts in the stock-selection progress.
Selecting companies that generate healthy cash flows, are well-managed and have strong corporate governance are among the manager’s focus, a fact that, according to research house Numis, will tend to lead to a bias towards consumer-related stocks including housing, banks and household products.
Over five years, the £106.9m trust has delivered a total return of 137.50 per cent compared with a gain of 103.93 per cent for the average IT Country Specialist Asia Pacific trust, as the below chart shows.
Performance of fund over 3yrs
Source: FE Analytics
India Capital Growth is currently trading at a discount of 13.7 per cent of its NAV, has ongoing charges of 1.79 per cent and is not geared.
Aberdeen Smaller Companies Income
The last name on our list is Aberdeen Smaller Companies Income. The portfolio, run by Aberdeen’s pan European equity team, is mainly invested in the ordinary shares of small companies and UK fixed income securities.
Its 10 largest holdings include Aveva, XP Power, Assura, Dechra Pharmaceuticals and DiscoverIE.
Over the last three years, Aberdeen Smaller Companies Income has delivered a total return of 55.06 per cent compared with a return of 35.58 per cent for the FTSE Small Cap (excluding investment trusts) and a gain of 31.34 per cent for the average IT UK Equity and Bond Income member.
According to the latest update, the managers have been preparing the portfolio for the impact of tighter monetary policy and stronger economic growth: “This we think will ultimately benefit the best quality businesses and therefore our focus will be on identifying companies with the most resilient earnings streams and strongest finances to grow over the long term.”
Aberdeen Smaller Companies Income is currently trading at a discount of 13.6 per cent of its NAV, has ongoing charges of 1.48 per cent and is 9 per cent geared. It yields 2.6 per cent.