Peel Hunt's trust bargains from Scottish Mortgage to songs

As the cost-of-living crisis dampens consumer spending appetites and the potentiality of a recession becomes more likely, investors have lost some of their enthusiasm. Peel Hunt has compiled a list to whet investors' appetites.

As the cost-of-living crisis dampens spending appetites and a recession becomes more likely, investors have lost some of their enthusiasm.

To whet their appetite, Peel Hunt analyst Anthony Leatham has compiled a list of investment trusts that present cheap opportunities and the potential for strong rebounds from here. 

Case in point is Scottish Mortgage (SMT ) which, after a ‘torrid’ reversal of its blistering performance earlier during the pandemic, wins a tip as its shares slip to a more than 10% discount to portfolio net asset value (NAV).

Equity bargains 

Though such growth-focused strategies have endured the worst losses during this year’s sell-off, market volatility and increasing uncertainty have created opportunities in some strange places. 

In a note on 8 June, Leatham said the dispersion of returns had been ‘particularly noticeable’ among UK equity trusts, with even some of the top performers derating. 

The analyst highlighted Fidelity Special Values (FSV ) and Temple Bar (TMPL ), trading on 6% and 5% discounts respectively, which have both outperformed their peers and indices recently.

Both focus on value stocks, those considered cheap by some metrics and often found in sectors like banking and commodities, which have received a boost in changing conditions. 

The 2.4%-yielding Fidelity Special Values, managed by Alex Wright and Jonathan Winton, has returned 0.4% year to date, according to fellow broker Numis. Meanwhile, the 3.5%-yielding Temple Bar, managed by Ian Lance and Nick Purves at Redwheel, has returned 5.4% over the same period.

Growth strategies have been knocked for six this year in both net asset value and share price terms, with Leatham noting ‘the growth-focussed Baillie Gifford trusts have had a torrid time in 2022.’ 

Both Scottish Mortgage (SMT ), the global equities titan with a market value of £11.8bn, and smaller companies stablemate Edinburgh Worldwide (EWI ) ‘have shifted from being expensive trusts trading on premiums…to double-discount situations following the recent correction’, Leatham wrote.

Year to date, Scottish Mortgage’s share price has fallen 40%, while Edinburgh Worldwide is trading on a 14% discount, with similar share price losses. Even since the note was written, the situation has noticeably worsened, with Scottish Mortgage slipping from a 10% discount to an estimated 14%. 

Europe and Japan

The European and Japanese equities sectors have recorded similar performance dispersion, which has yet to reflect itself in relative discounts:

  • Henderson European Focus Trust (HEFT ) has been resilient, boasting year to date portfolio returns that are 20% better than the worst performers in the sector, and trades on a wider-than-average discount of 14%.
  • CC Japan Income & Growth (CCJI ) has outperformed the Topix index and its peers in terms of NAV returns and continues to trade at a 5% discount.
  • Schroder Japan Growth (SJG ) has held up similarly to CC Japan, but is on a wider discount of 11%.

Healthcare

Discounts are on the recovery ward in the healthcare sector, so you may need to make your move soon, but RTW Venture (RTW ) has found it more difficult to shake off its 8% discount than its peers. 

‘The discount reflects the difficult April 2022 NAV (-12%), which is symptomatic of the portfolio split between private and public core positions and the focus on therapeutics and MedTech,’ Leatham wrote.

‘Even in the context of a much quieter initial public offering (IPO) backdrop, there are some exciting companies at the top of this portfolio across gene therapy, precision medicine and drug commercialisation in China.’

Private equity

Private equity specialists have also felt the brunt of the derating. Peel Hunt sees value across core holdings, shining a light on several bargains:

  • HarbourVest Global Private Equity (HVPE ) is currently trading at a massive 40% discount.
  • The 11% discount which HgCapital Trust (HGT ) shares are trading at looks attractive. 
  • 3i Group (III ) has also widened to a ‘rare 8% discount’.

Property plays

Last month’s comment from Amazon suggesting it was pausing its expansion of warehousing and logistics space caused a broad sell-off in logistics specialists, Leatham notes.

The share price reaction has left discount opportunities in the UK market across some big real estate investment trusts (Reits):

  • Warehouse Reit (WHR ) is trading on a 15% discount to prospective net asset value and is also yielding more than 4%.
  • The shares at LondonMetric Property (LMP) are currently on a 9% discount to prospective NAV.
  • Tritax Big Box (BBOX ) and its sister fund Tritax EuroBox (EBOX ) are trading on big 9% and 23% discounts respectively.

A ‘more niche property play’ in continental Europe is Phoenix Spree Deutschland (PSDL ). A firm favourite of Nick Greenwood (pictured below) at Miton Global Opportunities (MIGO ), this strategy focuses on the attractive Berlin residential market, Leatham says, and is trading at a 26% discount.

Following the resolution of the ‘Mietendeckel’ (rental cap) issue, investors can focus on a market with a strong demand and supply imbalance, high occupancy, strong rental growth and increased valuations. 

Cheap alternatives

In infrastructure debt, Sequoia Economic Infrastructure Income (SEQI ) has moved onto a discount of 1%, putting the shares on a yield of 6.4%. Leatham notes it is a diversified portfolio of 65 private debt investments and eight infrastructure bonds.

Among renewables trusts, JLEN Environmental Assets (JLEN ) is trading on at a 7% premium after recording big first-quarter gains, with full-year results due to be published next week. But Leatham still backs the trust, which has ‘consistently delivered peer-leading returns’. 

Ecofin US Renewables Infrastructure (RNEW ), trading on a 6% premium, is also tipped. Peel Hunt recently highlighted the enormous opportunity set in the US, coupled with Ecofin’s local presence and diversified mix of technologies, which Leatham expects to drive near-term NAV growth.

Ship shape

There has been a lot of attention on shipping, Leatham notes, as the supply and demand imbalance has been exacerbated by Russia’s invasion of Ukraine and the disrupted global supply chains. In terms of their view:

  • Tufton Oceanic Assets (SHIP ) reported strong NAV growth recently and has an attractive dividend which is more than fully covered, so its 4% discount offers extremely good value.
  • Taylor Maritime (TMI ) is in a similarly strong position to Tufton, but its shares are trading at a 16% discount. 

In the formerly buoyant song royalties sector, Peel Hunt highlighted Hipgnosis Songs Fund (SONG ), which continues to trade on a depressed discount of 9%. Leatham reiterates the positive influence of increased investment activity in the music royalty space, particularly among large private equity players.

In addition, there is potential for discount rate compression in this sector, along with improvement in revenues as the world reopens and music consumption broadens beyond streaming services.

Upcoming catalysts

Peel Hunt also highlighted a handful of trusts where there are upcoming opportunities to unlock value, in particular ScotGems (SGEM ).

In March 2022 it was announced that the investment management team at Stewart Investors was leaving and notice was given on the trust’s management. 

The board has since consulted with larger shareholders and plans to put forward a continuation vote at a general meeting, which will require 50% of votes for the vehicle to be wound up. 

While the board has not given its official recommendation, Peel Hunt notes that up to about 19% of ScotGems shares are held by value investors and a further 20% roughly by Stewart Investors insiders ‘who would have little incentive to vote in favour of continuation.’

As such, the broker believes the continuation vote is unlikely to pass, meaning the current 18% discount could act as an attractive entry point with capital being returned closer to NAV in the event of a wind-up. 

However, Leatham does caution there is limited liqudity in the trust, with only £32k traded daily on average over the last 30 days and a 3.9% spread, making it a risky play. 

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