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Investment Trust Watch: tasty discounts to EAT

Investment Trust Watch: tasty discounts to EAT

There are some tasty pickings this week for investors looking for overseas bargains as the weak pound continues to boost returns from outside the UK.

European Assets (EAT), a high yielding smaller companies fund based in the Netherlands, tops our list of ‘cheap’ trusts from Numis Securities as the gap between its share price and its underlying value returns to a post-Brexit low.

Shares in the London-listed investment company managed by Sam Cosh at F&C Investments closed yesterday 8.6% below their net asset value. The discount widened 5% during the week – and although rival funds trade on lower discounts – for a trust that has on average traded close to par (with no discount) in the past 12 months, that is unusual.

It is enough to give European Assets a Z-score of -3.2.

Just to recap, a Z-score is a measurement used by analysts to tell if an investment is trading significantly beyond its usual range. A Z-score of -2 or below is considered ‘cheap’ and may be a buying opportunity, while a score of 2 or more is viewed as dear and may be a sign to take profits.

Return of capital

European Assets is unusual in that it pays out 6% of its net asset value each year in three dividends. This is done by using capital reserves to top up the income it receives from its investments. It currently yields a high 8.4%.

In the three months since the EU referendum, the portfolio has been buffeted by volatile trading in the pound, although overall this has aided returns and its net asset value is up 14%. Over five years it has generated a total return to shareholders of 164%, ahead of a total increase in the portfolio of 145%.

The trust took a hit in August when one of its top 10 holdings, Portuguese postal operator CTT, fell heavily after disappointing results. Cosh is reviewing the stock.

'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
European Assets (EAT) -8.6 -0.4 -3.2
VietNam Holding (VNH) -24.0 -16.1 -3.0
Nimrod Sea Assets (NSA) -86.5 -69.0 -2.6
Schroder AsiaPacific (SDP) -14.6 -11.8 -2.6
JPMorgan Asian (JAI) -15.4 -12.7 -2.4
Scottish IT (SCIN) -13.9 -11.5 -2.3
Majedie (MAJE) -13.6 -3.6 -2.1
Standard Life Equity Income (SLET) -5.8 -1.5 -2.0
BACIT (BACT) -0.1 4.3 -2.0
Brunner (BUT) -19.9 -14.7 -1.9
Edinburgh Dragon (EFM) -14.5 -12.6 -1.9
Montanaro UK Smaller Companies (MTU) -23.4 -16.9 -1.8
India Capital Growth (IGC) -25.0 -19.4 -1.8
BlackRock Income Strategies (BIST) -9.2 -2.9 -1.7
Diverse Income (DIVI) -3.1 1.0 -1.7

Source: Numis Securities 6/10/16

Asia opportunites

Sticking with our first table, a third of this week’s cheap list are Asia trusts: two single country specialists and three regional funds.

Vietnam Holding (VNH), we saw last week, now stands at a 24% discount to NAV. It is joined by India Capital Growth (IGC), a good performer that has seen its discount widen to 25%. This follows the issuance of 3.7 million new shares in August after investors exercised subscription rights in the AIM-listed company. The trust raised £22.8 million, taking its gross assets to £110 million, although the market value is just £83 million because of the discount.

Schroder AsiaPacific (SDP) enters the table with a Z-score of -2.6 after its discount widened to 14.6%, lower than its one-year average of 11.8%. The trust supposedly targets a 10% discount but has bat least been buying and cancelling shares in recent months to reduce over supply.

Managed by Matthew Dobbs, the trust’s shares have soared 31.6% this year, slightly less than the 36% increase in the portfolio’s NAV. Over half of that gain has come in the last three months which may have prompted City of London Investment Management to trim its holding this week to just under 12%. Over five years shareholders hae enjoyed a total return of 95%.

JPMorgan Asian (JAI) has slipped to a slightly wider discount of 15.4% but a smaller Z-score of -2.4, making it the second cheapest trust in its sector. Ayaz Ebrahim joined manager Richard Titherington in June to help ensure the recent improvement in performance continues. The shares have gained 31.7% this year on the back of an NAV increase of 37.5%, with 21% of the shareholder return coming in the last three months.

Peter Moon, its latest recruit to the board, bought his first 10,000 shares on 29 September at 279p. They are now 291p. Moon also chairs Scottish American Investment Company (SCAM) and is a non-execuctive director of Gresham House (GHS).

Edinburgh Dragon (EFM) isn’t quite ‘cheap’ with a Z-score of -1.9 generated from a 14.5% discount but is interesting if you think that Aberdeen Asset Management’s ‘star’ fund manager Hugh Young can find a return to form. Five-year performance has disappointed with a total shareholder return of 56.5% but City of London topped up its position in August and now holds just over 12%. It is accompanied by other well-known value investors such as Lazards (12.7%) and Wells Capital Management (3.2%).

Asia switch

If you are wondering if this year’s rally in Asia means there is nothing left on the table, you may be reassured by a recent comment from Bank of America Merrill Lynch:

‘Growth in emerging markets (EM) continues to be the strongest in the world, leading to higher earnings. We have been long EM equities since March but now switch to Asia ex-Japan, reflecting EM strategist Ajay Kapur's view that the region has the best prospects.’

There have been worries that rising US interest rates would be bad for Asia and emerging markets if it meant American investors ‘repatriated’ their savings. However, although a rate rise from the Fed this year still looks likely, most experts think the rate of increases will be slow, with some pencilling in just another rate rise for next year. The possibility of a Donald Trump victory in the US presidential race remains a concern, however. A US protectionist policy would hurt emerging markets, at least in the short term, it is thought.

'Expensive' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Invesco Perpetual Enhanced Income (IPE) 5.3 2.6 3.3
Investor AB (INVEB) -5.8 -15.8 2.4
Vinaland (VNL) -23.4 -31.8 2.3
Tiso BlackStar Group (TBGR) -38.7 -49.2 2.3
Vietnam Infrastructure (VNI) -10.9 -27.2 2.1
Industrial Multi Property Trust (IMPT) -25.1 -42.9 2.1
Reconstruction Capital II (RC2) -18.8 -30.1 2.1
Riverstone Energy (RSE) -11.7 -23.7 2.1
Renewables Infrastructure Group (TRIG) 10.2 3.3 2.0
Boussard & Gavaudan - £ (BGHS) -18.4 -22.4 2.0
Global Resources (GRIT) -68.0 -79.9 2.0
Duke Royalty (DUKE) 93.1 10.7 2.0
GCP Infrastructure Investments (GCP) 22.5 13.8 2.0
HgCapital Trust (HGT) -7.1 -16.8 2.0
Amedeo Air Four Plus (AA4) 20.7 5.2 2.0

Source: Numis Securities 6/10/16

Lastly, it is worth highlighting – because I nearly forget myself –  that three of the trusts in the ‘cheap’ table – Scottish (SIT), Majedie (MAJE) and Brunner (BUT) – are labouring under a shadow caused by Aviva. The FTSE 100 pension and investment group has been disposing of its long-standing stakes in investment trusts this year. It retains big positions in these three and knowledge of the overhang is discouraging buyers.

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