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Investment Trust Watch: Lawdy! Debenture & mid caps look cheap

Law Debenture loses a long-standing premium while discounts widen on UK mid cap trusts in our roundup of investment trust trading opportunities.

 
Investment Trust Watch: Lawdy! Debenture & mid caps look cheap

It’s official. The long-standing premium on the shares of Law Debenture (LWDB ) has been revealed to be a fiction.

Nearly two weeks after the investment trust unveiled the £90.5 million valuation of its fiduciary services business for the first time, shares in the James Henderson managed global trust have moved to a discount in our weekly tables from Numis Securities.

As of yesterday’s close the 471p share price stood 9.9% below Numis’ estimate of the expanded net asset value per share, which has gone up 17% as a result of the inclusion of 61.3p per share for the pension trustee and whistleblowing subsidiary.

The discount is quite a contrast to the 6% average premium of the past year when Law Debenture appeared to trade above the NAV when that excluded the fiduciary business. That now leaves the trust on a -4.5 Z-score making it the ‘cheapest’ trust in our first table below.

Just to recap, Z-scores are a measure used by analysts to interpret investment trust premiums and discounts and to gauge whether a share price is significantly outside its 12-month trading range. Generally a Z-score of 2 or above indicates a trust is expensive compared to its history while a score of -2 or below shows it is cheap.

Cheap' trusts Share price premium (- discount) to net asset value % 12-month average % Z-score
Law Debenture (LWDB) -9.9 6.1 -4.5
Blackstone GSO Loan Financing (BGLF) -12.2 -0.2 -4.3
Witan IT (WTAN) -6.3 -0.2 -3.7
AEW UK REIT (AEWU) -3.6 3.9 -3.1
Mercantile (MRC) -15.7 -10.6 -3.1
Schroder UK Mid Cap (SCP) -16.0 -10.3 -2.9
Dolphin Capital Investors (DCI) -83.5 -70.2 -2.9
Princess Private Equity (PEY) -25.0 -15.2 -2.8
Jupiter Green (JGC) -9.7 -4.1 -2.8
Toro (TORO) -15.3 -2.4 -2.8
Third Point Offshore Investors - £ (TPOG) -15.6 -5.4 -2.8
Invesco Income Growth (IVI) -11.0 -7.0 -2.7
City of London (CTY) -0.9 1.5 -2.7
Henderson International Income (HINT) -7.0 0.0 -2.7
Fair Oaks Income (FAIR) -6.0 4.4 -2.6

Source: Numis Securities

Mid cap movers

Coincidentally, one of James Henderson’s other trusts, Lowland (LWI ), a UK equity income trust, saw its discount widen this week to 10.8% from 6.2% to give it a Z-score of -2.3, which is not quite enough to get into our table.

Two other trusts exposed to the ‘mid cap’ FTSE 250 portion of the UK stock market also look inexpensive. Mercantile (MRC ), a £1.5 billion fund managed by Guy Anderson and Martin Hudson of JPMorgan Asset Management, has seen its discount widen to 15.7% compared to the 12-month average of 10.6, giving it a ‘cheap’ Z-score of -3.1.

Just below it in the first table with a Z-score of -2.9 is Schroder UK Mid Cap (SCP ), whose discount has extended by a similar margin.

By contrast, Harry Nimmo’s Standard Life UK Smaller Companies (SLS ) has seen its discount narrow and trades close to par which gives it an ‘expensive’ Z-score of 2 and a place in our second table (see below).

These anomalies haven’t gone unnoticed by analysts at Stifel. In a note to investors they explained that in a reversal of 2015, this year has seen the FTSE Small Cap and FTSE 250 indices lag the FTSE 100 as the giant oil and mining stocks that dominate the blue chip index climb have recovered from last year’s meltdown in commodities.

‘Mercantile has widened out to a 15% discount which is at the top end of the six-month range of 6% to 15%. In contrast, Standard Life UK Smaller Companies, which has a strong one-year performance figure with the NAV +16% trading around NAV which compares with a six-month range of a 14% discount to a 3% premium,' they said.

‘In contrast, BlackRock Throgmorton, which has similar performance to Standard Life UK Smaller over three and five years, has seen its discount widen to a 16% discount. This is at the top of the six-month range of 16% to 5%. Henderson Smaller Companies is another fund with a strong track record which has experienced a sharp discount derating and it now trades at a 14% discount, offering some good value,' the analysts from Stifel added.

According to Numis, BlackRock Throgmorton (THRG ), managed by Mike Prentis, and Henderson Smaller Companies (HSL ) under Neil Hermon are on Z-scores of -0.9 and -1.8 respectively.

Meanwhile, Witan (WTAN ), the global ‘multimanager’ fund, and City of London (CTY ), the equity income stalwart, continue to trade below their usual ranges (see first table).

Expensive' trusts Share price premium (- discount) to net asset value % 12-month average % Z-score
Axiom European Financial Debt (AXI) 14.7 6.3 2.3
Independent (IIT) 4.4 -4.4 2.1
BB Biotech (BION) -7.0 -16.3 2.0
Standard Life UK Smaller (SLS) -0.1 -6.6 2.0
Burford Capital (BUR) 77.7 43.6 1.9
Tritax Big Box REIT (BBOX) 9.0 5.2 1.8
Phaunos Timber (PTF) -29.4 -36.3 1.8
BlackRock Frontiers (BRFI) 1.1 -3.4 1.8
British & American (BAF) 61.5 27.5 1.7
Polar Capital Global Healthcare G & I (PCGH) -1.9 -5.9 1.7
Aurora Russia (AURR) -5.0 -38.8 1.6
CATCo Reinsurance Opportunities Fund (CAT) 0.8 -2.4 1.6
European Real Estate (ERET) -17.7 -35.8 1.6
North Atlantic Smaller (NAS) -16.2 -19.2 1.5
BlackRock North American Income (BRNA) -5.9 -8.5 1.5

Source: Numis Securities

RIT Capital returns to premium

The start of March has seen some optimism return to stock markets after the horrendous start to the year.

The improved sentiment towards the mining sector is shown by the ongoing recovery in BlackRock World Mining (BRWM ). Its share price shot up another 15% this week despite the threat of a dividend cut next year in its full-year results this week. It still trades on a 15% discount and a Z-score of -1.2.

Last week I highlighted how RIT Capital Partners (RCP ) was trading on a small discount of just over 2%. That didn’t last long as the shares have moved to a 2.8% premium above their NAV. Possibly a warning from chairman Lord Rothschild in its annual results that we could be in the ‘eye of the storm’ encouraged some buyers for a trust that likes to boast of its defensive qualities.

Are alternative lending trusts coming back in from the cold after a savage de-rating last year? A week ago VPC Speciality Lending (VSL ) traded 9.3% below NAV, by yesterday the discount had narrowed to 3.9%. Similarly P2P Global Investment (P2P ) saw its discount come into 8.9% from 13%.

6 comments so far. Why not have your say?

Micawber

Mar 04, 2016 at 17:55

Thank you, Gavin, for these interesting weekly roundups - always worth reading.

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Brent Davies

Mar 04, 2016 at 18:26

Agreed an excellent weekly review. Information with a useful analysis,

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Simon PH

Mar 04, 2016 at 18:44

Can someone please explain what James Henderson is upto at Lowland. Down 16% over last 6 months down twice as much as index and yet still praised as outperforming manager. Its a mystery to me. Should have bought RIT instead

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Mickey

Mar 04, 2016 at 19:08

I wouldn't compare Lowland with RIT, different reasons to hold each. Compare Lowland to Finsbury Growth or Troy Income & Growth perhaps.

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Brian Stafford Garthwaite

Mar 07, 2016 at 11:56

Gavin - have just this weekly review - most interesting I shall be following you regularly

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ACM

Mar 10, 2016 at 08:20

Surely Caledonia IT at 20% discount is also worthy of comment.

Has anyone anything to offer?

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