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Investment Trust Watch: 'cheap' Scottish Mortgage

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Investment Trust Watch: 'cheap' Scottish Mortgage

This week throws up another opportunity to invest in Scottish Mortgage (SMT) shares shorn of their normal premium to net asset value (NAV).

Shares in the top-performing global trust yesterday closed at 416.1p, just a smidgen above its NAV of 415.6p, according to Numis Securities, and have shed another 3p this morning.

Yesterday's tiny 0.1% premium compares to the 2.5% average premium over NAV the shares have enjoyed over the last 12 months, and a 5.1% high over that period.

That gives the shares a Z-score of -2.7%, placing them firmly in the list of 'cheap' investment trusts compiled by Numis Securities.

Just to recap, a Z-score is a measure used by analysts to put a premium or discount on an investment trust into the context of its previous 12 months. Roughly speaking, an investment company or trust with a Z-score of -2 or below is 'cheap' while a score of 2 or more is viewed as expensive

'Cheap' trusts Share price premium (- discount) to NAV% 12-month average premium (-discount) % Z-score
Qannas Investments (QIL) -28.6 -2.6 -4.6
RM Secured Direct Lending (RMDL) 3.2 4.4 -3.9
PRS REIT (PRSR) 2.9 5.8 -3.1
Empiric Student Property (ESP) -2.8 5.7 -2.9
Scottish Mortgage (SMT) 0.1 2.5 -2.7
CATCo Reinsurance Opportunities Fund (CAT) -12.3 -0.3 -2.6
Masawara (MASA) -38.4 -33.3 -2.5
SQN Asset Finance Income C (SQNX) -1.1 5.0 -2.2
Pershing Square Holdings (PSH) -23.2 -17.9 -2.2
SQN Asset Finance Income (SQN) -0.7 10.5 -2.1
Bluefield Solar Income (BSIF) 2.6 7.7 -2.1
Sanditon Investment (SIT) -2.7 0.4 -2.0
TwentyFour Income (TFIF) -0.3 2.7 -1.9
Triple Point Social Housing REIT (SOHO) 3.7 4.2 -1.9
Blackstone GSO Loan Financing £ (BGLP) 2.7 4.7 -1.9

Source: Numis 21/9/17

The premium on the shares has been chipped away despite the continued strong performance of the trust, the UK's largest at £5.8 billion and since March a member of the FTSE 100.

Over five years its shares are up 210%, eclipsing the record of all other global investment trusts bar Lindsell Train (LTI), while since the turn of the year no other global trust has been able to match the 34.1% rise in net asset value delivered by managers James Anderson and Tom Slater.

The relative ‘cheapness’ of the shares also contrasts with those of its global peers. Discounts across the sector have narrowed over the last year, driven in part by investors seeking overseas exposure amid the uncertainty created by Brexit for the UK stock market and the pound.

Some, such as Lazard World Trust Fund (WTR) and Hansa Trust’s A shares (HANA) have made their way into the ‘expensive’ list and none, apart from Scottish Mortgage, have a Z-score below -2 that can properly be considered ‘cheap’.

It’s not the first time shares in Scottish Mortgage have looked ‘cheap’ this year: a brief opening to get the shares without their normal premium appeared in late July, too.

And it’s worth emphasising that this ‘cheapness’ is a relative measure. Shares in Scottish Mortgage have tended to trade on a premium since late 2014, enjoying a much higher rating that shares in global peers, which trade on average 5.2% below NAV. The relative stability of this premium also means that just a small narrowing can yield a big Z-score.

Joining Scottish Mortgage in the ‘cheap’ list is Empiric Student Property (ESP), which has endured a much more dramatic derating of its shares.

They have fallen to a 2.8% discount to NAV, with the 5.7% average premium they have enjoyed over the last 12 months wiped out.

Just over a week ago, that premium stood at 8.2%, largely supported by the trust’s strong yield, currently 6%.

But that has been wiped out by a 10.5% fall in the shares over the last two weeks, amid investor fears over the dividend, with cover now having fallen to 34% and the board no longer targeting ‘substantial’ cover by the end of the year.

'Expensive' trusts Share price premium (- discount) to NAV% 12-month average premium (-discount) % Z-score
India Capital Growth (IGC) -8.3 -18.2 4.0
Terra Catalyst (TCF) -38.8 -56.8 3.3
Templeton Emerging Markets (TEM) -11.5 -13.4 2.8
Lazard World Trust Fund (WTR) -5.8 -12.1 2.8
Phoenix Spree Deutschland (PSDL) 31.9 16.5 2.6
Premier Energy & Water - Ords (PEW) 0.6 -6.5 2.6
European Real Estate (ERET) 9.8 -18.1 2.5
TR Property (TRY) -2.7 -10.6 2.4
Hansa Trust A (HANA) -29.4 -32.3 2.3
Herald (HRI) -14.2 -18.9 2.3
BlackRock Emerging Europe (BEEP) -5.3 -10.1 2.3
AcenciA Debt Strategies (ACD) 0.1 -6.0 2.3
Independent IT (IIT) 6.5 -4.1 2.3
Sequoia Economic Infrastructure Inc (SEQI) 13.7 9.2 2.2
Fidelity Japanese Values (FJV) -9.7 -14.9 2.2

Source: Numis 21/9/17

Onto ‘expensive’ trusts, and India Capital Growth’s (IGC) plan to narrow its discount appears to be paying off, with the shares having yesterday closed just 8.3% below NAV, although they have fallen 2.4% this morning.

That contrasts with a discount that has averaged 18.2% over the last 12 months and reached as high as 25.3% over that period, placing the shares right at the top of the ‘expensive’ list with a Z-score of 4.

The board is planning to list on the London Stock Exchange’s main market, moving from the Alternative Investment Market and securing an equal footing with rivals Aberdeen New India (ANII) and JPMorgan Indian (JII).

Recent performance has been strong, with the trust delivering around double the NAV returns of its rivals over the last 12 months. IGC’s narrowing discount means the share price performance has been even more dramatic, with the shares up 50%, versus 19% for the Aberdeen trust and 13% for JPMorgan Indian.

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