Investment Trust discount opportunities

Alice Rigby of Kepler Partners highlights three investment trusts whose shares trade at a discount to their net asset value.

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  1. Kepler Partners

Discounts are one of the most prominent – and misunderstood - features of investment trusts. In my last article I wrote about how some boards are taking creative steps to try and control their trust’s discounts. However, it is relatively normal for trust’s discounts to close under their own steam.

One of the attractions of trusts, therefore, is that there is the potential to pick up discounted bargains – and enhance the returns produced by skilled asset management via a discount narrowing on a sustained basis.

But, to find out what is a legitimate opportunity and what is a persistent discount, it is worth identifying why some trusts sit on discounts and the reasons these close. For instance in 2012, investors in Fidelity Special Values saw their trust’s discount narrow dramatically from above 10% on the appointment of new manager Alex Wright. The trust now sits on a premium, despite its sector being out of favour.

In general, 2019 is not a good time to be looking for discount opportunities. Average discounts are at a historically narrow point – 3% narrower, in fact, that they achieved at their narrowest in the last cycle (prior to the 2008 crash).

However, Kepler Trust Intelligence’s senior analyst Thomas McMahon has identified nine trusts which he believes are on discount for idiosyncratic reasons – and therefore may present an opportunity. Here, we focus on three of them.

Baring Emerging Europe

This Trust’s board has taken several steps in a bid to narrow the discount. The trust is currently yielding 4.5%. This means that an investor will receive 52% of their initial investment back in ten years on the conservative assumption that dividends are grown by 3% each year.

The discount has only narrowed slightly following the board’s changes. We think this is due to the ongoing political confrontation between Russia and the West (Russia makes up 50% of the index). While it is hard to foresee a time when relations thaw, we think it likely that this happens eventually, or that these markets go through a period of being in favour, perhaps during the next bull market. At this point the fact the trust is the only closed-ended option in this space could also see it gain interest.

Aberdeen Standard Asia Focus

Aberdeen Standard Asia Focus has a ‘quality’ tilt, which is more in demand in struggling or sideways markets and means it is relatively light on ‘cyclical’ or economically-sensitive stocks, which are the quickest to move in rallies. We still believe that the next few years in Asian markets are likely to be more favourable to the trust than the last few, which saw growth and momentum styles dominate.

Furthermore, there are clear reasons for expecting a re-rating. Hugh Young, one of the most experienced fund managers in the market, was named lead manager in November as part of an overhaul requested by the board. The number of holdings has been cut and the concentration in the highest-conviction names raised, and we believe these changes increase the chance of significant outperformance in the future. As such, the discount of 11.2% looks unwarranted relative to the sector weighted average discount of 4.9%.

Oakley Capital Investments

Oakley is an AIM-listed direct private equity trust, focusing on the consumer, education and technology sectors. The team typically invest at a very early stage and back proven entrepreneurs in niche businesses, help them professionalise their companies and achieve the next leg of growth. This process has seen them become the third-best performing listed private equity fund over ten years in net asset value terms, returning 150% for a peer group average (excluding Electra) of 105%.

Despite this solid long-term record, the discount widened in 2016 to 40%. One reason was dilutive share issuance, and having seen the market’s reaction the board has committee to not do this again. They also responded by committing to a dividend (4.5p a year ongoing) and ramping up investor relations activities. There has been some success, with the discount coming in to 25%.

Disclosure

Fidelity Special Values, Baring Emerging Europe, Aberdeen Standard Asia Focus and Oakley Capital Investments are clients of Kepler Partners. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security or securities discussed. See www.trustintelligence.co.uk for more information.

This content is supplied by the named third party and does not represent the views of Charles Stanley. Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

 

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