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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.
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|
|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|
|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.
|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|
|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%.
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More about this:
Look up the shares
- Dolphin Capital Investors Ltd
- Toro Ltd
- Third Point Offshore Investors Limited GBP
- OldCo Ltd
- BB Biotech AG
- Burford Capital Ltd
- Tritax Big Box REIT PLC
- Polar Capital Global Healthcare Gro & Inc Tst PLC
- CATCo Reinsurance Opportunities Fund Ltd
- Blackrock North American Income Trust PLC
Look up the investment trusts
- Law Debenture Corporation (Ordinary Share)
- Blackstone/GSO Loan Financing (Ordinary Share)
- Witan (Ordinary Share)
- AEW UK REIT (Ordinary Share)
- Mercantile (Ordinary Share)
- Schroder UK Mid Cap (Ordinary Share)
- Princess Private Equity (Ordinary Share)
- Jupiter Green (Ordinary Share)
- Invesco Income Growth (Ordinary Share)
- City of London (Ordinary Share)
- Henderson International Income (Ordinary Share)
- Fair Oaks Income Fund (Ordinary Share)
- Independent (Ordinary Share)
- Standard Life UK Smaller Co. (Ordinary Share)
- Phaunos Timber (Ordinary Share)
- BlackRock Frontiers (Ordinary Share)
- British & American (Ordinary Share)
- Aurora Russia (Ordinary Share)
- European Real Estate IT (Ordinary Share)
- North Atlantic Smaller Cos (Ordinary Share)
- Lowland (Ordinary Share)
- BlackRock Throgmorton Trust (Ordinary Share)
- Henderson Smaller Companies (Ordinary Share)
- BlackRock World Mining Trust (Ordinary Share)
- RIT Capital Partners (Ordinary Share)
- VPC Specialty Lending Invest (Ordinary Share)
- P2P Global Investments (Ordinary Share)
More from us
- Law Debenture clears up confusion over premium rating
- Investment Trust Watch: Nimmo hero, property zero
- Top Trusts: I'm down but not out as flight turns to fight
- Five Top Trusts for Global Growth
- Will UK Smaller Companies funds recover?
- BlackRock World Mining raids reserves for dividend
- Investment Trust Watch: mining rally going 'cheap'
- Lord Rothschild: we're in 'the eye of the storm'
- Investment Trust Watch: City of London swings low
- Andrew Bell: 'still markets may conceal crocodiles' in 2016
- Investment Trust Watch: watch out for RIT Capital
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by David Kempton on May 24, 2016 at 17:15