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Investment Trust Watch: the rush for UK mid cap

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Investment Trust Watch: the rush for UK mid cap

It’s been a frenetic week for investment trusts with chaotic movements in closed-end funds as investors responded to the ‘Black Monday’ crash starting in China four days ago.

Over-sold Asia and emerging markets investment trusts have been snapped up with new potential opportunities opening up in our table of ‘cheap’ trusts (see below).

Meanwhile, there has been a surge of share issuance from popular funds such as Finsbury Growth & Income (FGT) and Strategic Equity Capital (SEC).

Lastly, but not least, there's been a big shift by investors into investment trusts focused on ‘mid cap’ medium-sized UK stocks.

Tuesday’s ‘bargains’ gone

Intrepid investors were quick to pounce on the Asia and emerging market trusts we identified earlier in the week as their shares plunged to new lows below net asset value (NAV).

The wave of bargain hunting means only one of the 15 ‘cheap’ trusts we published on TuesdayStandard Life European Private Equity (SEP) – remains in today’s list from Numis Securities (see first table).

The hoovering up of Hugh Young’s Aberdeen New Dawn (ABD) and Edinburgh Dragon (EFM) investment trusts means their shares have reverted to trade at around 12% below NAV, in line with their one-year average.

Similarly, Henderson Far East Income (HFEL), Fundsmith Emerging Markets (FEET), Blackrock Latin American (BRLA), Utilico Emerging Markets (UEM), New India (NII) and Baillie Gifford Shin Nippon (BGS) are not the bargains they recently were, with either their discounts narrowing sharply or even flipping over to become small premiums (where the share price stands a few percentage points above NAV).

New ‘bargains’

In their place we have a gaggle of new potential opportunities with our first table containing a mix of Asia and alternative investment funds.

Just to recap, the tables from Numis Securities rank trusts by their ‘Z-score’ (right hand column). This measure shows whether a share trades above or below its normal range and helps investors interpret whether a discount or premium is significant. Roughly speaking, a Z-score below -2 is regarded as being ‘cheap’ and above 2 is getting ‘expensive’.

Note: The figures for discounts and premiums shown in the middle columns are calculated by Numis. It compares yesterday’s closing share price for a trust with its daily estimate of the trust’s net asset value. This is because many trusts publish their NAVs every afternoon for the previous day’s close. That means at the start of each day the NAV figure is getting quite old and, in fast moving markets like we’ve had this week, can become out of date.

'Cheap' trusts Premium (- discount) to NAV % Average premium (- discount) % Z-score
Gabelli Value Plus (GVP) -3.3 5.2 -4.8
John Laing Infrastructure (JLIF) 5.7 13.1 -3.8
JPMorgan Global Convertibles Income (JGCI) -7.2 1.5 -3.7
Henderson Alternative Strategies (HAST) -21.5 -17.5 -3.7
International Public Partnerships (INPP) 4.5 9.3 -3.5
Mithras IT (MTH) -17.6 -9.0 -3.4
Juridica Investments (JIL) -26.7 4.0 -3.4
Pacific Horizon (PHI) -14.1 -9.6 -3.2
HgCapital Trust (HGT) -17.1 -10.5 -3.1
Aberdeen Private Equity (APED) -31.1 -25.3 -2.9
Cambium Global Timberland (TREE) -44.5 -34.3 -2.9
Tritax Big Box REIT (BBOX) 0.4 6.3 -2.9
Jupiter Green (JGC) -6.7 -2.3 -2.8
Establishment IT (ET) -25.8 -20.0 -2.7
Standard Life Euro Private Equity (SEP) -24.0 -16.7 -2.7

Source: Numis Securities

Battered 'alternatives'

The trust with the lowest Z-score today is Gabelli Value Plus (GVP), a £91 million fund launched last year to invest in US companies it thinks can be improved or bought. After a 10% fall in the share price in the past month the trust has moved from a premium to a small discount.

Maintaining the Asia theme is Establishment (ET), a small global fund managed by Henry Thornton at Blackfriars. It is 72% invested in Asia, according to Numis, which explains why its discount has widened to nearly 26%, although that also reflects that its shares are illiquid and hard to trade. Similarly, Pacific Horizon (PHI) has moved to a 14% discount, lower than its one-year average.

With many investors battening down the hatches this week, it’s no surprise to see anything branded as an ‘alternative’ taking a beating.

Shares in two funds investing in roads, bridges and hospitals have come under pressure as investors worry about rising interest rates. John Laing Infrastructure (JLIF), which published half-year results today, is the worst performing of the social infrastructure funds, which may also explain why its premium has dropped to 5.7% from a 12-month average of 13%. It yields 5.7% in dividend income, however. International Public Partnerships (INPP) has also seen its premium rate wane.

Henderson Alternative Strategies Trust (HAST), the global fund of funds formerly known as Henderson Value Trust, has seen its discount widen close to an all-time low of 21.5% from 15% a month ago. In May the board gave managers Ian Barrass and James de Bunsen 18 months to improve performance following the switch to Henderson from SVM in 2013. Over three years the shares are down 16%. Note, its NAV was last published on 21 August before the mayhem from China erupted.

Private equity funds have also been under the cosh. Mithras (MTH), which last published its NAV on 30 June, stands on a discount of nearly 18%, according to Numis, while the broker believes Aberdeen Private Equity (APEF), which last revealed its NAV for the end of July, trades 31% below its underlying value.

'Expensive' trusts Premium (- discount) to NAV % Average premium (- discount) % Z-score
NB Distressed Debt Investment (NBDD) 5.5 -5.5 6.6
Blackstone GSO Loan Financing (BGLF) 6.4 0.9 4.7
Invesco Perpetual Select - Balanced Risk (IVPB) 4.9 -1.7 4.5
Industrial Multi Property Trust (IMPT) -51.8 -74.6 4.2
JPMorgan Mid Cap (JMF) -3.4 -11.6 3.0
Mercantile (MRC) -8.7 -11.7 2.7
Pacific Alliance Asia Opportunity (PAX) 0.6 -6.6 2.7
Reconstruction Capital II (RC2) -37.9 -57.1 2.6
NextEnergy Solar (NESF) 8.4 3.4 2.6
AEW UK REIT (AEWU) 5.9 4.5 2.4
Yatra Capital (YATRA) -10.9 -34.3 2.3
Fidelity Special Values (FSV) 0.3 -6.7 2.3
Lowland (LWI) 3.8 -3.4 2.3
Standard Life Equity Income (SLET) 4.0 -3.1 2.3
BlackRock Throgmorton Trust (THRG) -11.0 -15.3 2.2

Source: Numis Securities

Plunge into mid cap

The biggest move of the week was not about bargain hunting, however. Our second table (above) shows a bevy of UK ‘mid cap’ funds have become a bit dear as investors have reckoned that exposure to the domestic economy is the place to be with global markets looking rocky.

With the FTSE 100 dominated by miners and financial stocks suffering in the fall out from China, there is a clear logic to moving into funds that buy UK shares outside the UK’s leading index.

In theory this makes UK smaller company funds attractive. They have done very well this year too and our table shows the discount on Mike Prentis’ BlackRock Throgmorton (THRG) trust narrowing to 11% as investors buy the shares, helping to making it the best performing smaller company trust in the year to date with a 23.8% return.

However, with so much uncertainty around, investors are wary about getting stuck in smaller company funds which can find their holdings hard to trade in a serious downturn.

By contrast, funds investing in ‘mid caps’ or companies in the FTSE 250 offer liquidity and a haven from the blue chip ‘Footsie’.

Consequently, our table is dominated by these funds. The Georgina Brittain managed JPMorgan Mid Cap (JMF) fund and its stable mate Mercantile (MRC), run by Martin Hudson and Guy Anderson, have been much in demand this week with their discounts narrowing sharply from their one-year averages.

This means if you want top-performing funds with UK mid cap exposure you will have to pay a bit extra.

Alex Wright’s £535 million Fidelity Special Values (FSV) trust now trades close to par after investor demand eradicated the stock’s discount. It has a three-year total return of 102%, second only to James Henderson’s Henderson Opportunities Trust (HOT) which has generated 147%.

Speaking of James Henderson, his Lowland (LWI) investment trust has moved to a small premium of 3.8% compared to its one-year average discount of 3.4%. It’s the top performing UK equity income trust over five years with a 154% total return.

Similarly, Tom Moore’s Standard Life Equity Income (SLET) has jumped to a 4% premium from its one-year average discount of 3.1% to NAV. The £198 million fund yields 3.1% and leads its sector over one year with a 19.5% total shareholder return.

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