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Investment Trust Watch: mighty 3i falls to a discount

Stock market turmoil continues to throw up opportunities as shares in private equity giant 3i Group trade on first discount in three years.

 
Investment Trust Watch: mighty 3i falls to a discount

This week saw a dramatic illustration of the poor sentiment afflicting private equity investment trusts as shares in 3i Group (III) fell to their first discount in three years.

While big discounts have dogged the sector since the financial crisis, 3i, the £4 billion market leader, bucked the trend as its shares soared to a premium of over 40% to net asset value at one point in response to the turnaround orchestrated by chief executive Simon Borrows.

That goodwill is over for now it appears with the shares at last night’s close standing 9% below their NAV following a 20% slide in the past six months. That’s in stark contrast to the near 28% average premium of the past 12 months and gives it a Z-score of -3.3 in Numis Securities’ table of the 15 ‘cheapest’ investment trusts.

Just as a reminder, a Z-score is a measure used by analysts to assess where an investment trust’s share price stands in relation to its history. A Z-score of -2 or below shows a trust trading significantly below its 12-month range, and is therefore potentially ‘cheap’, while a score of 2 or above indicates the price is above its range and is therefore arguably ‘expensive’.

'Cheap' trusts Share price premium (- discount) to NAV % 12-month average premium (- discount) % Z-score
Fair Oaks Income (FAIR) -7.1 5.2 -4.2
Kennedy Wilson Europe Real Estate (KWE) -6.6 7.6 -3.9
Princess Private Equity (PEY) -24.8 -14.8 -3.7
P2P Global Investment C (P2P2) -13.9 -1.0 -3.6
Foresight Solar (FSFL) -4.6 1.9 -3.6
Ranger Direct Lending (RDL) -10.4 4.9 -3.4
BlackRock World Mining (BRWM) -19.1 -10.9 -3.4
AEW UK REIT (AEWU) -1.1 4.4 -3.4
Pantheon International (PIN) -30.1 -17.5 -3.3
NewRiver Retail (NRR) 8.7 25.0 -3.3
3i Group (III) -9.0 27.6 -3.3
GLI Alternative Finance (GLAF) -4.6 2.0 -3.3
Third Point Offshore Investors - £ (TPOG) -14.0 -4.5 -3.2
Sequoia Economic Infrastructure  C (SEQC) -1.1 3.0 -3.1
Templeton Emerging Markets (TEM) -14.9 -12.0 -3.1

Source: Numis Securities 11/2/16.

The persistent double-digit discounts of private equity investment trusts combined with the market turmoil offer plenty of choice for bargain hunters in the sector right now. Other trusts with low Z-scores in the table include Princess Private Equity (PEY ), which is unusual for its sector for paying dividends and offering a good yield, and Pantheon International (PIN ), another investor in private equity funds which is on a 30% discount.

But it is 3i that stands out as an example of what could be an excessive sell-off, although in the current 'risk-off' mood it is quite possible the discount could widen further. Its discount is lower than rivals, but its recent de-rating has been much sharper.

Is that out of step with trading? A third quarter statement from the company at the end of last month showed the its underlying portfolio of private, unlisted companies generated a 7.4% total return in the three months to the end of last year.

The uplift included a further big contribution from its main holding in Action, a Dutch retailer, up over 11%, but according to the company the rest of the portfolio also put in a ‘resilient’ performance with little direct exposure to emerging markets or oil and gas.

'Expensive' trusts Share price premium (- discount) to NAV % 12-month average premium (- discount) % Z-score
Ecofin Water & Power Opportunities (ECWO) -10.6 -19.4 3.8
British & American (BAF) 83.7 24.6 3.3
Independent IT (IIT) 6.8 -5.1 3.1
Threadneedle UK Select (UKT) -4.1 -9.8 3.0
Honeycomb IT (HONY) 3.7 3.4 3.0
Phaunos Timber (PTF) -27.5 -36.8 2.8
Aurora Russia (AURR) 6.0 -41.3 2.6
Damille Investments II (DIL2) -9.3 -16.2 2.6
India Capital Growth (IGC) -12.3 -17.6 2.4
Axiom European Financial Debt (AXI) 9.5 4.8 2.4
SQN Asset Finance Income C (SQNC) 8.6 5.2 2.4
Seneca Global Income & Growth (SIGT) 4.3 -2.4 2.3
BB Biotech (BION) -8.1 -16.9 2.3
F&C Capital & Income (FCI) 4.1 0.9 2.3
AXA Property (APT) -7.6 -17.6 2.2

Source: Numis Securities 11/2/16.

Elsewhere in the cheap corner, we have a familiar mix of debt and direct lending funds (Fair Oaks Income, P2P Global, Ranger Direct, GLI Alternative Finance), property trusts and renewable and infrastructure funds.

A similarly eclectic mix is in the ‘expensive’ trusts with high Z-scores in the second table. Remarkably, given investors jitters recently over high growth stocks, Switzerland's BB Biotech (BION) has seen its discount narrow to 8% giving it a Z-score of 2.3.

4 comments so far. Why not have your say?

dlp6666

Feb 12, 2016 at 12:32

Any explanation as to why Kennedy Wilson (KWE) has fallen so dramatically, though?

report this

Micawber

Feb 18, 2016 at 07:38

Both Morningstar and HL have 3i at a discount of 0.96% not 9% at yesterday's close, Gavin.

report this

Gavin Lumsden (Citywire)

Feb 18, 2016 at 18:23

Micawber, 3i's discount has narrowed since last week.

dlp6666, I think Brexit fears are partly to blame.

report this

Graham Barlow

Mar 09, 2016 at 15:44

Nobody knows what the assets are worth. It is all guess work in this climate. What with China. EU Chaos, Brexit. Who can make an educated guess as to the value of their porte folio

report this

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That was 'some kind of bubble in biotech!'

by Gavin Lumsden on Jul 27, 2016 at 07:00

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quite ready yet