The countdown is on

With only a couple of weeks to go until the end of the tax year on 5 April, most financial advisers will have already decided how to use clients’ individual savings account (ISA) allowances. But for those looking for last-minute opportunities to take advantage of tax-efficient ISAs, the investment companies sector might offer a happy hunting ground right now.

That’s because the stock market volatility of the past few weeks – reflecting the impacts of Russia’s invasion of Ukraine – has had a marked effect on large parts of the sector. Funds have naturally suffered as their investments have stuttered amid the volatility, but the nervousness of investors has amplified this effect – the shares of many funds are now trading at much wider discounts to the value of their underlying assets than just a few weeks ago.

Discounts – and premiums – are a feature of the investment companies universe. It is demand and supply that determines the price of an investment company’s shares, and this can get out of sync with the value of the fund’s underlying assets. Sometimes, the shares trade at a discount – that is, they undervalue the fund’s holdings – and at other times, they trade at a premium.

For long-term investors, it usually makes sense to look through short-term movements in discounts and premiums. They are focusing on the long-term growth prospects of a fund, rather than trying to make a short-term call about valuations.

However, there are times when it pays to think a little bit harder about price – and this could one of them.

Right now, the average investment company’s shares trade on a discount of just over 4% to the value of its assets according to Winterflood Securities – that’s widened from below 1% at the start of the year.

Moreover, that’s just an average – some funds have seen a much more dramatic shift. Allianz Technology has gone from a premium of 1.3% at the beginning of the year to a discount wider than 10% today. Edinburgh Worldwide has gone from a premium of 0.6% to a discount of more than 11%. Almost the entire range of Baillie Gifford-managed investment companies has moved from premium ratings to discounts.

One way to identify the most striking potential bargains on this basis is to look at investment companies’ “Z scores”. These measure the extent to which the discount on a fund today is out of kilter with its average discount over the past year. On this basis, Winterflood’s analysis picks out Invesco Select Global Equity Income, Schroder British Opportunities and BlackRock Greater Europe as some of the cheapest funds on the market right now – but there are examples across almost every investment company sector of funds that have moved onto cheaper valuations during the past month.

Now, cheap does not necessarily mean good value. There may be all sorts of reasons why an investment company’s discount widens, including both market factors and issues with the fund itself. Looking at Z scores and other valuation yardsticks can only ever be the beginning of an investment selection process.

However, many financial advisers maintain lists of investment companies they favour – funds where they are confident in the manager and the long-term potential for outperformance. Where those funds have moved to cheaper valuations, now could be a really good time for a closer look on behalf of investors for whom they may be suitable.

Indeed, for advisers running out of time to make their final ISA selections of the 2021-22 financial year, the re-rating of so many investment companies in recent weeks has come at an opportune moment. Now could be the chance to buy the perfect long-term holding at a bargain-basement price.