Peel Hunt trust pickers have identified seven ‘cheap’ investment companies for bargain hunters looking to take advantage of a sector-wide derating that has left share price discounts at their steepest in many years.

Anthony Leatham (pictured first below) and Markuz Jaffe (pictured second), the broker’s investment company analysts, say last year’s fourth quarter rally has faded so far in 2024 amid uncertainty over when central banks in the UK, US and Europe will cut interest rates.

Excluding 3i Group (III ), the private equity giant whose shares trade at an expensive 39% premium above net asset value (NAV), all other London-listed closed-end funds trail at an average 15% below the value of their investments.

The analysts say that’s created lots of opportunities to buy shares on lows, particularly in ‘alternative’ funds investing outside equities in infrastructure, renewables and property. These have proved extremely vulnerable to rising interest rates. 

As a result the analysts believe the ‘first leg of discount narrowing’ – and share price improvement – will rely on the Bank of England cutting base rate if and when inflation falls below its 2% target rate in the next few months.

However, they caution that the recovery could take about two years. The investment company sector has taken 25 months on average to pull back from previous discount lows in March 2003, December 2008, December 2011 and June 2016. That suggests the recovery from last October – when rate cut hopes first emerged – has ‘a long way to go’.

Fortunately, many investment companies are doing what they can to improve performance and re-rate their shares.

Here are the analysts’ seven top picks of investment companies where there are catalysts for a share price recovery. 

Peel Hunt is a market maker in all the shares but is not corporate broker.

RIT Capital Partners (RCP )

Peel Hunt dropped the £3.6bn Rothschild-backed global multi-asset fund from its New Year growth recommendations in January after its disappointing performance in the previous two years. 

However, the publication of ‘modest but positive’ annual results last month have prompted a rethink by Leatham and Jaffe. They believe the 30% discount and committed share buybacks by the board, which has repurchased £183m in the last 15 months, indicates a potential turnaround for the fund which is defensively positioned with 41% in quoted equities, 36% in private investments and 25% in strategies not correlated to mainstream stock markets.

‘RCP has seen some manager and leadership change in the past year and the trust has been buffeted by the macro winds. However, we continue to believe that today’s discount reflects the past and fails to recognise the potential rebound in fortunes as private equity valuations (both direct and through funds) are brought up to date.

‘The next milestone is expected to be the March NAV announcement in mid-April,’ they said.

Chrysalis Investments (CHRY )

The duo upgraded their rating of the controversial growth capital fund to ‘outperform’ from ‘neutral’ in early February, reckoning the £887m investment company would pass a continuation vote on 15 March. It duly did as shareholders looked to the board and managers to pursue a recovery programme after its crash  in 2022.

The analysts were reassured by our report this week that activist Asset Value Investors has ploughed £42m to take a leading 8.4% stake through its AVI Global (AGT ) and MIGO Opportunities (MIGO ) trusts. 

On a 41% discount, they believe the shares offer value after the board agreed new terms with the managers after they left Jupiter to set up their own company, and pledged to return £100m of capital from investment gains by buying back the shares.

‘Investors will now look to the top four holdings (64% of the portfolio) for the next catalyst,’ they said, with Klarna, the credit provider that accounts for 11% of assets, seen as the most likely to float and generate gains.

This would make up for the painful writedown the company suffered raising money in 2022, knocking a big hole in Chrysalis’ valuation and causing outrage over the huge performance fee fund managers Richard Watts and Nick Williamson had previously earned.

Schiehallion (MNTN )

The arrival of activist US hedge fund Elliott and the subsequent launch of a £1bn share buyback programme has caused great excitement at Scottish Mortgage (SMT ). But with the shares up 32% in the past six months and trading at a narrow 5% discount, the analysts wonder if investors should turn to Baillie Gifford stable mate Schiehallion? 

The £979m private equity portfolio owns several unquoted stocks held by Scottish Mortgage, such as SpaceX and Tik Tok operator Bytedance, an area where Elliott reportedly believes there is more value to be unlocked. At a 35% discount, shouldn’t the ’same view on latent value also apply to MNTN?’ the analysts asked.

Annual results this week showed the portfolio essentially went nowhere in the year to 31 January with net asset value down 0.9%. Big gains in listed holdings such as digital lender Affirm, money transfer specialist Wise, mobile app developer Bending Spoons and Elon Musk’s SpaceX were offset by falls in US digital freight broker Convoy, tech company Indigo Agriculture and low carbon chemical provider Solugen.

Tufton Oceanic (SHIP )

Recent half-year results have highlighted the shipping fund’s strong financials as well as the positive supply-demand dynamics supporting the rates at which its ships are chartered, said the analysts. 

They were impressed by a ‘robust’ 10% investment return combined with a 17.6% increase in the dividend to 10 cents a share that is forecast to be covered 1.8 times by earnings. This provides an attractive prospective yield of 9% at the current low share price.

‘With an ongoing buyback programme, a proposed one-off return of capital in the second quarter of between 5% and 10% of NAV’ and a possible wind-down and sales of assets starting in 2028, the analysts are confident SHIP’s 23% discount will narrow.

Gresham House Energy Storage (GRID )

Renewable energy funds are the place to go for possible bargains although with average share price discounts widening from 20% to 33% in the past year, investors need to beware of catching falling knives. 

The Peel Hunt trust pickers know a bit about this having first included battery fund GRID in their income tips last year before transferring the company to its growth recommendations in January.

Unfortunately, GRID has provided neither income or growth, plunging 62% this year on a dividend cut caused by falling power prices and a slump in UK trading revenues.

Nevertheless, the analysts are sticking out their hands again in the hope of a recovery, saying, ‘Using our estimated NAV impact of -38%, this would bring GRID’s NAV down to c91p and put the shares on a 55% discount – wide even in the context of an investment company facing challenges.’

Cordiant Digital Infrastructure (CORD )

Leatham and Jaffe picked this 6%-yielder as an income tip in January. They continue to back the £848m portfolio which, while undiversified and dominated by two central European broadcast businesses, has generated good revenue and earnings that are expected to cover the dividend by 1.6 times.

Overshadowed by the problems at rival Digital 9 Infrastructure (DGI9 ), which last month confirmed it would wind down and slowly return shareholders’ money, Cordiant shares have fallen to an unjustified 42% discount.

‘The balance sheet does not appear stretched, and we see scope for dividend growth from 4p, given the strength of dividend cover,’ they said.

Pershing Square Holdings (PSH )

Shares in the £11bn FTSE 100 listed US fund have narrowed their discount to 27% from a one-year average of 33%. That’s way too wide for the Peel Hunt analysts when they consider the 210% shareholder return fund manager Bill Ackman has achieved with the focused 10-stock portfolio over five years. 

Having in recent years introduced a dividend and bought back $1.1bn of shares in an unsuccessful attempt to banish the discount, Ackman announced in February a plan to launch a new New York listed fund, Pershing Square USA. 

The manager has bullishly forecast this could raise $10bn which Ackman would use to lower the fees paid by PSH shareholders, thus boosting their returns and ‘adding to the value in the current discount’, the Peel Hunt analysts said.