The great investment trust sale
David Prosser highlights some investment trusts that are historically cheap.
James Budden, head of global marketing at Baillie Gifford, has just written a spirited defence of the investment trust sector. And while you might think this is a case of “he would say that, wouldn’t he?”, given that Baillie Gifford manages several investment trusts, it’s worth at least considering what he says. If you think Mr Budden’s arguments stack up, now could be a great time to go bargain hunting.
There’s no denying that investment trusts are going through a tough period. Market volatility and bearish sentiment have seen the share prices of many funds slip to wide discounts to the value of their underlying assets. Wealth managers have expressed concerns about the liquidity of all but the largest trusts. Regulatory issues around how fees are disclosed haven’t helped either.
However, Mr Budden points to the 150-year-plus track record of the sector as evidence of its survival abilities. He highlights unique investment trust attributes ranging from their ability to take on gearing to the opportunity for boards to launch corporate actions that drive value for shareholders.
There is a chance to benefit from a double whammy of performance.
David Prosser
Investors will make up their own mind. But if you’re persuaded, new analysis from AJ Bell makes interesting reading. It highlights no fewer than 26 investment trusts whose shares are currently trading at a discount that is at least five percentage points higher than the average discount on which they’ve traded over the past five years. In other words, by the standards of recent history, these investment trusts currently appear to be going very cheap.
There’s no shortage of choice in the AJ Bell list. Trusts highlighted include well-known mainstream funds such as Smithson Investment Trust and Caledonia Investments, currently trading on discounts of 10.8% and 34.3% respectively; that’s 5% and 5.5% higher than their average discounts over the past five years.
Lindsell Train Investment Trust and RIT Capital Partners, long-time favourites for many investors, are also included, trading on discounts that are 13.1% and 12.8% percentage points respectively over their five-year average.
Or you might consider more specialist funds. There are several biotech-focused funds in AJ Bell’s list, reflecting the travails of that sector. Niche funds on unusually wide discounts include Augmentum Fintech, Weiss Korea and Golden Prospect Precious Metals.
Now, the fact these funds are going so cheaply doesn’t mean that they are bargain buys. There may be very good reasons why individual investment trusts have slipped to particularly wide discounts. Due diligence, naturally, is required.
Moreover, even where an investment trust is trading at a wider discount simply because of market sentiment, there is no knowing when that sentiment might change, triggering a reversal of the fund’s fortunes.
Still, for investors focused on long-term returns, these discounts, at the very least, offer potential opportunity. If and when they begin to make positive progress, there is a chance to benefit from a double whammy of performance, with a narrowing discount adding to your returns.
Does that tempt you? Baillie Gifford’s James Budden makes a fundamental point about discounts. “The attraction is in the word itself,” he says. “If you can buy on a wide discount, you may have a bargain, and if it stays the same, there is no harm done.”
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
