David Prosser investigates recent offerings of investment companies trading on unusually low valuations.
Who doesn’t love a Black Friday bargain? But while many of us may have been tempted by a cheap deal on the latest gadget or a new outfit last week, one “offer” doing the rounds came as a surprise: several analysts were offering cut-price investment companies.
To be fair, this was something of a cheat, in that the deals in question weren’t a one-time bargain or even tied to the big day itself (though as consumer groups argue, this is true of much of the Black Friday marketing machine too). The analysts in question were simply pointing to a number of investment companies currently trading on unusually low valuations.
The pitch from the team at Money Observer was typical. It picked out three investment companies, F&C UK Real Estate Investments, Tritax Big Box and Woodford Patient Capital. In each case, shares in these funds are currently trading at an unusually wide discount to the value of their underlying assets. At the F&C fund, for example, the current discount of 17.4% compares to an average of 5.4% over the past year; at Tritax, the prevailing discount of 4.4% compares to a 12-month average of a premium of 7.8%; and Woodford Patient Capital’s discount of 11.6% compares to its one-year average of 10.6%.
In historical terms, then, these were genuine Black Friday bargains. But is it really a good idea to go shopping for investment companies in this way?
Well, there are two different ways to look at that question. On the one hand, advisers know very well that long-term investment is about building a portfolio of assets appropriate to the investor’s appetite for risk and his or her financial objectives; that’s very different to trying to second-guess the market by trading in and out of what appear to be pricing opportunities. On the other, for investors focused on increasing their exposure to a particular asset class – say real estate, commercial property or patient capital – these unusually wide discounts could represent a smart moment to do exactly that.
To balance those two arguments, caution is required. Investors and advisers eyeing a bargain need to think carefully: first, do they really want long-term exposure to the assets in these funds, and second, are these the right vehicles through which to secure that exposure? Cheap isn’t necessarily cheerful – a wide discount may be an anomaly created by the prevailing market conditions, or it may be a sign that all is not well with the fund.
It’s worth pointing out too that the funds picked out by Money Observer all invest in relatively illiquid assets. In that context, the discounts at which they trade are a sign that the investment company structure is working in the way it should. As investors move out of these funds – possibly amid the general sense of anxiety seen in the markets over the previous months – their share prices are flexing accordingly; meanwhile, their managers are able to get on with the job of managing the assets, rather than having to worry about redemptions.
One other thought: it’s not wrong to trade investment companies – or any other asset – in order to try to benefit from short-term pricing opportunities, as long as you recognise this is speculation rather than long-term investment. Lots of people enjoy doing this – and some are very successful – but it’s a different type of activity to sensible financial planning.
So, with Black Friday behind us, advisers and investors need to take the same cautious approach to investment company bargains as they are hopefully now bringing to a seemingly cheap deal on a top-of-the-range smart TV or a cut-price cashmere coat. We all love a bargain but focus on the long term.