Peel Hunt analysts have flagged a raft of investment company bargains, with rare opportunities to pick up listed funds in infrastructure, private equity and real estate at knock-down prices, while global equity giant Scottish Mortgage (SMT ) has fallen to a low rating not seen since the 2008 global financial crisis.

Anthony Leatham, head of the broker’s investment companies team, said some closed-end funds were unjustifiably ‘signalling distress’ in response to the uncertainty over the economy, interest rates and banking sector. 

In a note co-written with analysts Markuz Jaffe and Thomas Pocock, Leatham said the ‘opportunity-cost of not getting involved at these levels is akin to the post-global financial crisis period’, especially in the ‘jam tomorrow’ growth-focused funds, which in retrospect could turn out to be extraordinarily cheap.

Scottish Mortgage

The £9bn Baillie Gifford flagship has fallen to a steep 21% discount following unprecedented boardroom upheaval after former non-executive director Amar Bhidé criticised the board and fund manager’s ability to oversee a private equity sub-portfolio that has swelled to the maximum 30% of assets approved by shareholders.

The wide discount - more than double the average of the past year when Scottish Mortgage shares plunged from the top of the tech bubble as interest rates rose - reflects the distrust investors have to private equity valuations and the concern that its net asset value (NAV) is not up to date.

In Scottish Mortgage’s case this suspicion looks unfair. The analysts note the frequency with which the trust’s unquoted investments have been reviewed: 92 investments were revalued 585 times in last year’s turbulent markets. That saw its average private company decline by 34%, in line with the 33% decline in the US Nasdaq technology index.

The Peel Hunt team also noted the £290m the trust had spent buying back its shares since January 2022 in an effort to narrow the discount, or gap between the price and NAV.

Tellingly, though, while the analysts note the trust’s retains a strong long-term performance despite the savage derating since November 2021, they don’t issue a ‘buy’ recommendation, clearly feeling Scottish Mortgage is not quite out of the woods. 

‘Given the cloud of negative sentiment hanging over Scottish Mortgage, it is not clear where the discount will settle,’ said Leatham.

‘However, if we apply the average private equity trust discount of 40% to the unlisted holdings, and a 15% discount to the listed equity assets, then a blended discount of around 22% is fair value.’

This suggests Scottish Mortgage could be at its low point and needs a catalyst, such as the flotation of one of its big private equity holdings, like SpaceX, or a peaking in interest rates, before the trust can re-rate. History suggests that can happen quickly, so that could make the shares attractive for a long-term buyer, as fund managers and wealth managers have recently suggested. 

Other growth bargains

RIT Capital Partners (RCP ), the Rothschild-backed multi-asset fund, has suffered ‘a similar fate’ to Scottish Mortgage due to criticism of its historically high 41% exposure to private assets. The shares trade on a 23% discount, having fallen 12% this year despite a 2% rise in the underlying portfolio. The analysts repeated their view that the chance for upside from this level was good. ‘As previously noted, we see a contrarian opportunity at these levels, as opposed to a catastrophic downward revaluation.’ 

They also flagged the 50% discount on HarbourVest Global Private Equity (HVPE ), life sciences fund Syncona (SYNC ) on a 25% discount and Augmentum Fintech (AUGM ), whose portfolio of financial technology companies is available on a discount of 36%.

Baillie Gifford’s global smaller companies trust Edinburgh Worldwide (EWI ), biotech fund RTW Venture (RTW ) and Aberdeen Diversified Income & Growth (ADIG ) were also cited as being on exaggerated discounts of 18%-32%.

A lack of scale and liquidity was also hampering HydrogenOne Capital Growth (HGEN ), still languishing on a 53% discount after jumping this week when its board noted there was no reason for its 38% slump in March.

‘These really are extraordinary levels, not seen since the global financial crisis,’ they said. 

Alternative rewards

Infrastructure and property trusts offering inflation-linked returns have also fallen out of favour as rising rising interest rates and higher gilt yields make cash and bonds attractive for the first time in years (although Artemis fund manager Kartik Kumar this week made a good case for equities).

The analysts picked Octopus Renewables Infrastructure (ORIT ) trailing on a 16% discount despite ‘having recently put through a 10.5% increase in the dividend’ and reporting full-year results showing ‘strong dividend cover to support this diversified strategy’ and 6% yield. They also reiterated their liking of 8%-yielding Sequoia Economic Infrastructure Income (SEQI ) on a 14% discount.

Renewable funds also look cheap, with battery fund Gore Street Energy Storage (GSF ) trading on a 16% discount versus a 12-month average premium of 4%.

‘Understandably, there is a lot of excitement about the structural need for battery storage and the important role that it plays in the energy transition,’ Peel Hunt said.

‘However, the Gore Street discount may be a reflection of how far-out some of their construction projects are, particularly when compared to the other two peers in the sector.’

SDCL Energy Efficiency Income (SEIT ), the largest of its peer group, has also seen its discount widen to 22%, despite offering a 7% yield and having the scale and liquidity lacked by its rivals. 

‘We note that there are some exciting developments in the portfolio, which are either not particularly well understood or have been overlooked by investors,’ they said.

Property picks

There has been a significant derating in the real estate investment trust (Reit) sector, including a sell-off in long-income, inflation-linked strategies, such as LXI Reit (LXI ) on a 32% discount. Peel Hunt said Supermarket Income (SUPR ) – which soared in the pandemic rebound – had fallen as interest rates rose and now stood on a 25% discount to its June 2022 NAV. Other analysts said the gap had narrowed to 2% against their latest NAV estimates after half-year results yesterday showed a 20% slump in the second half of last year. One of its managers said: ‘We think this is the bottom. Yields look pretty attractive.’

The analysts also liked the 36% discount of Residential Secure Income (RESI ), which offers a yield of 8% for a ’resilient portfolio of shared-ownership properties’.

Continuation catalyst

The analysts also have their eyes on Abrdn Japan (AJIT ) which will now face a continuation vote at the annual general meeting in July having seen its shares trade at an average discount of more than 10% in the past three months. The analysts expect the £68m trust will survive the vote but will have to offer a tougher discount control mechanism to placate the value investors who own 30% of the shares. This could narrow the 16% discount and provide some momentum for the stock which is flat so far this year.