Three investment trusts for contrarians

Rob Morgan considers three investment trusts that may be of interest to value-seeking investors.

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  1. Rob Morgan

Contrarian investing involves buying into particular areas or individual assets that are considered to be ignored or underappreciated by the wider investment community. By targeting poorly-performing and unfashionable investments buyers hope to pick up a bargain, wait for positive sentiment to return and reap decent returns.

Although it requires patience, it can be a lucrative form of investing. The knack is identifying what constitutes a bargain and what is a trap. As famed investor Warren Buffett remarked, “Price is what you pay, value is what you get”.

Investment trusts often offer clues about sentiment and present opportunities for value-seeking, contrarian investors. Unlike unit trusts and OEICs, investment trusts are “closed ended”, which means there are a certain number of shares in them. Therefore the price is dictated by supply and demand rather than a calculation of the underlying asset values. Over time, prices broadly track movements in the value of the portfolio, but shares can trade at a “premium” or a “discount”, which among other things is influenced by investor sentiment.

This characteristic of investment trusts can be an added risk. For instance, the share price of an investment trust could fall solely due to investors being less willing to pay a premium, as opposed to any actual fall in the value of the underlying assets. Conversely, it can signal an opportunity to buy in at an attractive price in the case of a share trading at a large discount relative to its history.

The shifting picture of discounts and premiums across various investment trust sectors can also paint an interesting picture of what is popular and what is not – an interesting resource for contrarian investors. Investors should bear in mind, however, that a Trust trading at a discount does not necessarily represent a good investment opportunity.  Sometimes there are less obvious underlying reasons why something is trading at a discount that suggest a cautious approach is warranted.

The following Trusts all trade at discounts and have, in our view, been subject to weak investor sentiment recently. There is no guarantee this will change, but for the value-conscious contrarian investor they may be of interest.

Each represents a different investment approach and level of risk, and they are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus.


Aberforth Smaller Companies

For some time now investors have been avoiding the UK. Global asset allocators as well as domestic investors have been reducing their exposure, or steering clear altogether, owing to the uncertainty posed by seemingly endless Brexit negotiations. Shorter term political wranglings rarely turn a good business into a bad one, though. Lots of companies are still doing well despite confidence being in short supply. UK equities generally trade at low levels in relation to their earnings and future growth prospects, and this could signal an opportunity to take a different view from the consensus; one that has the potential to be highly profitable in the longer term.

Against this backdrop, we believe Aberforth Smaller Companies Investment Trust is worth a look. Aberforth is a privately owned, “boutique” fund manager, that has specialised in UK smaller company investing for around 25 years. Their particular approach focuses on finding less fashionable businesses at below what they consider to be intrinsic value. This style has been a headwind in recent years with investors prioritising “quality” companies offering highly probable growth in earnings against a backdrop of low returns from other assets such as cash or bonds. Yet we retain confidence in Aberforth’s approach and talented team, and believe the Trust could provide strong returns over the longer term.

Shares currently trade at a substantial discount to net asset value of around 8%. There are no guarantees an improvement in sentiment towards UK smaller companies or greater enthusiasm for value-orientated managers, and for UK smaller companies in general, will reverse this, but it is another factor that could work in the favour of investors buying the shares.

The Key Information Document for this Trust can be found here.


Aberdeen New India Investment Trust

After an uncertain first quarter of 2019, the Indian general election may bring some clarity and re-establish the long-term case for Indian equities: Domestic consumption supported government reforms to tax policy and the financial system.

The representative in this area on our Foundation Fundlist is Goldman Sachs India Equity Portfolio Fund. However Aberdeen New India Investment Trust is also well regarded by our Research Team and comes at an attractive discount presently. In 2018 the Trust’s board took a number of steps to attempt to improve its popularity and address the stubborn double-digit discount. The result was a new fee structure and the introduction of the ability to ‘gear (borrow to invest), creating a leaner investment with greater potential for outperformance – although gearing does also increase risk.

Aberdeen is well known for expertise in global emerging markets, and in India their approach of seeking good quality firms at attractive valuations has generally worked well – although past performance is not an indication of future returns. The team are patient and disciplined investors who take a long term view and maintain a high hurdle for corporate governance standards. The discount of 10% is wide relative to its small peer group and we believe this has the potential to narrow, thus providing additional potential return versus other investments in this niche area.

The Key Information Document for this Trust can be found here.


F&C Commercial Property Trust

F&C Commercial Property is among the largest closed-ended property trusts listed in the UK. It pays investors a stable level of income, distributed monthly, and underpinned by a diverse pool of commercial property assets. The Trust offers a spread of exposures by region and asset class, but is skewed towards its largest asset, St Christopher’s Place. This pedestrianised shopping street in the West End of London represents around a fifth of the portfolio.

Our Research Team admirethe experienced and settled management team, headed by Richard Kirby, and believe that the Trust’s large size is important in helping to drive down costs. Following changes to the cost structure from the start of 2017 it is among the most competitively priced in the sector, and we believe it is worth considering for investors seeking broad UK commercial property exposure.

The yield won’t typically be the highest in the sector due to the manager’s preference for higher quality assets, which generally have lower yields. However, due to weak sentiment a discount of around 13% has emerged between the fund’s share price and its net asset value – as a consequence the yield is higher than it has typically been at around 5% at time of writing.

For much of the recent history of the Trust shares have traded on a premium.  The current discount likely stems from jitters surrounding Brexit, as well as concerns about the retail sector where the challenge from online competition is putting pressure on bricks and mortar outlets. A resolution to Brexit would be the chief catalyst to improve sentiment and increase activity in the property market, but the active management of properties in the portfolio could also add value over time. Meanwhile, in many property sectors outside retail rents are still rising or stable, which supports a strong flow of income.

The Key Information Document for this Trust can be found here.


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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