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Investment Trust Watch: catch a bargain while you can
More than 100 investment trusts looked ‘cheap’ after share prices slid this week but with markets rebounding opportunities were vanishing.
A further brutal sell-off in the stock market this week generated an abundance of potential bargains as the shares of many investment trust fell below their normal trading range.
By the close of Thursday a total of 108 investment trusts had Z-scores of -2 or below, according to data from Numis Securities. This is unprecedented in the short history of this column. Normally, our list of the 15 ‘cheapest’ trusts from Numis ranges between around -2 and -3. This week the range in our first table below is between -3.4 and -5.
Just to recap the Z-score is a measure used by analysts to tell if an investment trust is trading outside its historical range. Z-scores are useful because they can prevent investors from simply buying a trust because the shares are on a discount below their net asset value. A big discount does not necessarily mean cheap if the shares are habitually undervalued. Roughly speaking a Z-score of -2 or below is considered ‘cheap’ while a score of 2 or above is ‘expensive’ (see second table).
Focus on Henderson European trusts
A bevy of debt, private equity and renewable energy trusts populate our first table of ‘cheap’ trusts. Carador Income (CIFU ), a high yielding fund that invests in debt bundles known as ‘collateralised loan obligations’, registered a lowly -5 Z-score after its shares fell more than 15% below NAV, significantly more than their 12-month average discount of 3%.
More interesting for mainstream investors, however, are a trio of Henderson trusts that have moved to small discounts for the first time in a while. Whether you think they, or many of the other trusts highlighted in this article, are potential bargains depends on if you think the slide in their shares this year has been over done and whether a rebound on Friday has removed the opportunity.
By Thursday’s close shares in Henderson European Focus (HEFT ), managed by the highly regarded John Bennett, had fallen 14% this year, pushing them 3% below NAV, the first discount on this trust in two years. The shares added 0.8% on Friday.
Similarly, Henderson Eurotrust (HNE ), managed by the equally experienced Tim Stevenson, were at their first discount in a year after an 11.5% fall in the shares in the year to Thursday's close. They gained 2.5% on Friday.
Meanwhile, Henderson Far East Income (HFEL ), run by Mike Kerley, had tumbled 11% to raise its dividend yield to 7%. The shares stood at a 4% discount by the end of Thursday, their biggest in three years. This isn’t big compared to rival Aberdeen Asian Income (AAIF ) on a 10% discount but it gets a lower Z-score because the discount is infrequent. The shares then advanced 3% on Friday.
It’s been a tough start to the year for the Henderson stable of trusts. As we reported yesterday, Lowland (LIC ), one of three trusts run by manager James Henderson, had slumped 18% by Thursday’s close making it the worst performing UK-focused investment trust so far this year. Henderson is a popular, contrarian investor and the UK equity income fund has suffered from his buying into the likes of oil giant Shell and mining group Glencore too early. The shares jumped 7.2% on Friday, however.
|'Cheap' trusts||Share price premium (- discount) to NAV||12-month average premium (- discount)||Z-score|
|Carador Income Fund (CIFU)||-15.6||-3.2||-5.0|
|Pantheon International (PIN)||-29.9||-16.7||-4.6|
|Better Capital 2009 (BCAP)||-39.0||-18.7||-4.5|
|Graphite Enterprise (GPE)||-27.3||-15.6||-4.4|
|Fair Oaks Income C (FAIC)||-1.1||2.4||-4.4|
|CQS New City High Yield (NCYF)||-9.1||2.8||-4.2|
|CVC Credit Partners Euro Opps - £ (CCPG)||-5.7||0.4||-3.9|
|Fair Oaks Income (FAIR)||-1.1||5.9||-3.8|
|Henderson European Focus (HEFT)||-3.3||1.4||-3.8|
|Foresight Solar (FSFL)||-3.2||2.1||-3.8|
|Henderson Eurotrust (HNE)||-3.2||1.0||-3.5|
|Henderson Far East Income (HFEL)||-4.1||1.0||-3.5|
|John Laing Environmental Assets (JLEN)||-2.6||5.2||-3.5|
|Volta Finance (VTA)||-29.7||-14.1||-3.5|
|Ranger Direct Lending (RDL)||-5.6||5.8||-3.4|
Source: Numis Securities
It’s been a crazy week. Many significant trusts were left trading on low valuations that would normally have merited inclusion in the Numis table of ‘cheap’ trusts.
Fundsmith Emerging Equities (FEET ), down 11% year to date, dropped to a small discount of 2.4% below NAV, giving it a Z-score of 3, an attractive entry point perhaps if you like manager Terry Smith’s non-nonsense approach to emerging markets. The shares recovered 2.9% on Friday.
Witan (WTAN ), the global multi-manager run by chief executive Andrew Bell, slipped to a 2.7% discount and a Z-score of -2.8 after an 8.5% drop in the share price since the New Year. It closed 2.9% higher on Friday.
If you like your discounts wide, Caledonia Investments (CLDN ), the global trust backed by the wealthy Cayzer dynasty, could be interesting on a 21% discount and a Z-score of -2.6. Its shares had fallen 9% this year by Thursday’s close but added 1.7% on Friday.
Woodford Patient Capital Trust (WPCT ) has fallen 13% this year so investors, like myself, should be grateful a wider discount hasn’t opened on the stock. The shares stood just 0.4% below Numis’ estimated NAV for the trust on Thursday, but because the shares have traded at a premium for much of the past nine months that produced a Z-score of -2.5 for the £800 million fund, which largely invests in early stage biotech and healthcare companies. The shares bounced 3.5% higher on Friday.
It doesn’t quite achieve bargain status yet, but Strategic Equity Capital (SEC ), the top performing UK smaller companies trusts of recent years, looked inviting on a 5% discount and a -1.7% discount after a 16% slide in its share price. It leaped 4.3% on Friday.
|'Expensive' trusts||Share price premium (- discount) to NAV||12-month average premium (- discount)||Z-score|
|Axiom European Financial Debt (AXI)||7.1||3.9||4.2|
|Atlantis Japan Growth (AJG)||-3.0||-8.6||3.8|
|Aurora Russia (AURR)||8.6||-44.2||3.6|
|Burford Capital (BUR)||76.8||38.0||2.7|
|SQN Asset Finance Income C (SQNC)||6.5||4.5||2.7|
|Seneca Global Income & Growth (SIGT)||4.3||-2.9||2.6|
|Phaunos Timber (PTF)||-29.4||-37.2||2.6|
|AXA Property (APT)||-7.3||-18.3||2.5|
|European Real Estate (ERET)||-14.7||-39.6||2.3|
|Independent IT (IIT)||2.2||-5.8||2.3|
|Lindsell Train IT (LTI)||33.3||19.9||2.0|
|Baillie Gifford Japan (BGFD)||6.4||2.4||1.9|
|Threadneedle UK Select (UKT)||-6.1||-9.7||1.9|
|Damille Investments II (DIL2)||-11.6||-16.7||1.8|
Source: Numis Securities
Remarkably, considering the bearish mood of markets, some trusts managed to become more expensive. Our second table shows Atlantis Japan Growth (AJG ), down 6.1% year to date, narrowed its discount to 3% by Thursday's close. Baillie Gifford Japan (BGFD ), run by veteran Sarah Whitley, advanced to a 6% premium and 1.9 Z-score.
Seneca Global Income & Growth (SIGT ) moved to a 4.3% premium and a 2.6 Z-score after shielding investors from the worst of the falls with a 1.8% decline in its share price in the year to Thursday's close.
Intriguingly, Aurora (ARR ) – previously the worst-performing UK investment trust – has seen its shares fall just 1.6% this year as its new manager restructures the portfolio.
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Look up the shares
Look up the investment trusts
- Carador Income Fund USD (Ordinary Share)
- Pantheon International (Ordinary Share)
- Better Capital PCC 2009 (Ordinary Share)
- Graphite Enterprise Trust (Ordinary Share)
- Fair Oaks Income Fund C (Ordinary Share)
- CQS New City High Yield (Ordinary Share)
- CVC Credit Partners GBP (Ordinary Share)
- Fair Oaks Income Fund (Ordinary Share)
- Henderson European Focus Trust (Ordinary Share)
- Foresight Solar (Ordinary Share)
- Henderson EuroTrust (Ordinary Share)
- Henderson Far East Income (Ordinary Share)
- John Laing Environmental Asset (Ordinary Share)
- Volta Finance (Ordinary Share)
- Ranger Direct Lending Fund (Ordinary Share)
- Atlantis Japan Growth (Ordinary Share)
- Aurora Russia (Ordinary Share)
- SQN Asset Finance Income C (Ordinary Share)
- Seneca Global Income & Growth (Ordinary Share)
- Phaunos Timber (Ordinary Share)
- AXA Property (Ordinary Share)
- European Real Estate IT (Ordinary Share)
- Independent (Ordinary Share)
- Lindsell Train (Ordinary Share)
- Baillie Gifford Japan (Ordinary Share)
- Threadneedle UK Select Trust (Ordinary Share)
- Aurora (Ordinary Share)
- Aberdeen Asian Income (Ordinary Share)
- Lowland (Ordinary Share)
- Fundsmith Emerging Equities (Ordinary Share)
- Witan (Ordinary Share)
- Caledonia Investments (Ordinary Share)
- Woodford Patient Capital Trust (Ordinary Share)
- Strategic Equity Capital (Ordinary Share)
More from us
- Investment Trust Watch: New Year opportunities
- Beaten-up trusts bounce back as investors hunt bargains
- Henderson holds nerve after brutal Lowland sell-off
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by Gavin Lumsden on Jul 22, 2016 at 16:24