Yesterday’s market storm over Silicon Valley Bank has widened investment company discounts and created some interesting buying opportunities in both growth and income funds. 

Hydrogen deflates

On the more speculative growth end, HydrogenOne Capital Growth (HGEN ) fell 8.6% to 53p on Monday. That left the shares, which had already featured in our ‘cheap’ Trust Watch list in recent weeks, trading 45.5% below net asset value (NAV) compared to their 40.4% discount on Friday. 

Against a much narrower, one-year average discount of 8.6% that generated a lowly -3.4 ‘Z-score’, according to Numis Securities data, which makes HGEN currently the UK’s cheapest closed-end fund on that measure. For context, a score of -2 or below is generally viewed by analysts as ‘cheap’.

You can read the positive thoughts of our columnist James Carthew who reviewed the £125m portfolio launched 20 months ago earlier this month.

New bargains

Other fallers into the ‘cheap’ net with one-year Z-scores under -2 include:

• JPMorgan Japan Small Cap Growth & Income (JSGI ) which closed Monday on a 12.5% discount compared to a one-year average gap to NAV of 7.9%. The past year has been a tough start for Miyako Urabe and Xuming Tao who took over as managers of the  £197m growth fund when Eiji Saito left to retrain as a lawyer. The shares are down 9% but the pair, with co-manager Nao Ozawa, are confident the acceleration of automation and digitisation from the Covid pandemic - and the Japan market’s cheap valuation - can improve the trust’s long-term performance. The market appears sceptical and the shares are off another 2.5% at 308p today. 
• Manchester & London (MNL ), the maverick £182m global growth trust run by Mark Sheppard at M&L Capital Management, has seen its discount expand to 26% against a 12-month average of 18%. Performance of the tech-focused portfolio has crumbled in the growth selloff of the past 18 months. Investors might baulk at a fund that boasts a 29% weighting to Microsoft, with Sheppard enthused by its cloud prowess and Chat GPT-enabled Bing search engine, but there’s no denying the conviction with which the manager and his team approach their task. Someone appears to be buying with the shares up 2.6% to 343p today.
• Asia Pacific fund Abrdn New Dawn (ABD ) looks interesting on a 14% discount versus the one-year 12% average if you think the region will do better than the West on the back of a recovery in China, in which fund managers James Them and Xin-Yao Ng are 28% invested. However, the low rating does reflect its poorer performance against rivals such as Invesco Asia (IAT ) and Pacific Assets (PAC ) which are available on relatively narrow discounts of 8% and 7% respectively. The shares are unchanged at 265p.

‘Cheap’ income funds 

Two formerly highly-rated income funds are trading close to ‘par’, or NAV, in the uncertainty over bank finance and interest rates, which could appeal to yield-seekers who no longer need to pay a premium for their favourite funds.

GRID’s growth and income

Gresham House Energy Storage (GRID), the £860m, 4.4%-yielding battery fund that yesterday reported a stonking 39.1% return for last year, closed at 159.5p last night in line with Numis’ latest NAV per share estimate, although slightly above the new 31 December NAV of 155.5p per share. Either way that’s cheaper than the 13% average premium investors have had to pay for the shares in the past year. 

Many infrastructure funds have de-rated in the past five months as spiking government bond yields have underlined the more expensive environment in which we now operate. GRID is also unlikely to repeat its 2022 performance in a hurry but with a growing and covered dividend (this year’s target was lifted 5% to 7.35p per share and last year’s 7p payout was 1.3 times met by earnings), Liberum, the trust’s corporate broker reiterated its ‘buy’ recommendation with a 193p price target.  

Don’t sniff at SMIF 

Lastly, TwentyFour Select Monthly Income (SMIF ) looks attractive with its 76p share price last night in line with the NAV per share published last week. That ‘par’ rating generates a -2.2 Z-score against a one-year average share price premium of 2%, and so is more of a bargain than rivals Henderson Diversified Income (HDIV ) - on a 3% discount and 0.8 Z-score - and CVC Income & Growth (CVCG ) - the dividend hiking floating rate loan fund on a 5% discount and 0.7 Z-score. 

The £185m SMIF offers a high 8.6% yield after the portfolio of asset-backed, mortgage and high-yield bonds was thumped by last year’s historic falls in bond markets. Although investors’ capital took an 18.9% hit in the year to September, the investment company over-delivered on its monthly dividend target, paying a total of 6.39p instead of 6p per share. That looks to be tempting some with the shares up 1.3% today.

Worries over banks is probably weighing on the shares given it has around a third of its assets in subordinated financial bonds. However, in a note on Friday, lead manager Gary Kirk insisted the collapse of Silicon Valley Bank was an ‘idiosyncratic’ event that said more about the mis-match between its customers’ short-term deposits and the long-term bonds they placed their money in, rather than any wider concerns about banks, particularly in Europe. 

‘It should also be noted that European bank treasury accounts typically hold short-dated government bonds, which limit the size of the potential mark-to-market loss in the event of a forced sale.

‘Finally, the European banks typically hold more capital than US counterparts and are better regulated, including down to the smallest more focused lenders,’ Kirk said.