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Investment Trust Watch: Scottish Mortgage reverts to discount
Scottish Mortgage, the UK's biggest listed equity fund, trades below net asset value for second time this year.
Fans of mean reversion – the theory that says asset prices and investment returns eventually move back to their average – will be pleased to see Scottish Mortgage Trust (SMT ) having another bid at trading below net asset value.
Shares in the country’s biggest listed equity fund, with a market value of over £3.1 billion, finished trading on Thursday at a 3% discount below NAV having been close to par a week ago.
This is the second time this year SMT shares have fallen beneath the value of the high growth portfolio managed by James Anderson and Tom Slater.
In January when the trust’s internet and biotech holdings tumbled in the New Year sell-off the shares hit a discount of 5%, before recovering in February.
The revival of the discount suggests nervous investors are still reducing their exposure to equities and sectors that have performed strongly in recent years. Scottish Mortgage has delivered an 86% total return to shareholders over the past five years but its shares have fallen nearly 14% this year ahead of the 8% decline in the underlying portfolio.
Buybacks could be in order
The discount has prevented the trust from issuing more shares this week. It has steadily issued stock from its treasury since the end of October 2014 when the share price first reached premium above NAV. However, it hasn’t issued any for over a fortnight and, if the discount persists, its next move may be to follow Foreign & Colonial (FRCL ), Witan (WTAN ) and Murray International (MYI ) to change tack and buy back some shares in order to reduce the excess supply of stock.
Of course that may not happen if investors look at our table below and decide a discount on the second-best performing Global trust over 10 years (admittedly some way behind the premium-rated Lindsell Train (LTI )) is a buying opportunity. In which case the discount may vanish like a puddle in the spring sunshine!
Because SMT has stood at an average premium of just over 2% in the past year, the current discount gives it a low Z-score of -3.5, making it one of the cheapest trusts in our first table from Numis.
Just to recap, a Z-score is a measure used by analysts to see how far an investment is trading above or below its usual range. As a rule of thumb, a Z-score below -2 is considered ‘cheap’ while a score above 2 is viewed as ‘expensive’.
Whether a low Z-score is a cue for investors to buy in or not is obviously a personal decision. SMT is widely admired for having delivered a highly active and successful investment strategy at low cost (its on-going charges last year were 0.48%, below the 0.78% average of the Global sector, according to the Association of Investment Companies).
However, analysts have recently commented that the trust's punchy, no-holds growth approach may struggle in the current environment, which is why its policy on share buy backs could be crucial as no one will want it to revert to the double digit discounts of over five years ago.
In a recent note, Iain Scouller of Stifel said: 'The trust has grown considerably in recent years through share issuance on a premium and we expect the board will want to minimise any discount the shares may de-rate to.
'Therefore, we assume that even if the difficult market conditions continue there will be limited discount de-rating from here. On the assumption that downside on the discount is only to around 2% or 3% below NAV and markets at least stabilise or see some recovery, we maintain a "neutral" rating.'
However, he added: 'In this environment, if investors dislike leverage [borrowing to invest] and concentrated portfolios they should be especially wary of the shares, in our view.'
|'Cheap' trusts||Share price premium to net asset value (- discount) %||12-month average||Z-score|
|Blackstone GSO Loan Financing (BGLF)||-13.3||-0.4||-3.9|
|Scottish Mortgage (SMT)||-3.0||2.3||-3.5|
|Law Debenture (LWDB)||-8.3||5.8||-3.5|
|City of London (CTY)||-1.7||1.5||-3.1|
|Fidelity European Values (FEV)||-11.2||-5.7||-3.1|
|Aberdeen New Dawn (ABD)||-15.7||-12.2||-3.0|
|Witan IT (WTAN)||-5.7||-0.3||-2.9|
|Schroder UK Mid Cap (SCP)||-16.7||-10.4||-2.9|
|Dolphin Capital Investors (DCI)||-84.3||-70.6||-2.8|
|Baring Emerging Europe (BEE)||-16.4||-11.9||-2.8|
|Third Point Offshore Investors - £ (TPOG)||-16.0||-5.6||-2.6|
|Princess Private Equity (PEY)||-24.9||-15.4||-2.6|
|AEW UK REIT (AEWU)||-3.0||3.7||-2.6|
Source: Numis Securities
Unloved Fidelity European
Joining them this week is Fidelity European Values (FEV ), the most heavily discounted trust in the Europe sector, which trades 11% below NAV and has a Z-score of -3.1. Although its manager, Sam Morse, is well known, five-year returns have not matched rivals and investors may be switching elsewhere. The stock has steadily de-rated since last summer when the shares stood at just 2% below NAV. Fans of mean reversion may expect it to unwind until it reaches the 15% discount it stood at three years ago.
|'Expensive' trusts||Share price premium to net asset value (- discount) %||12-month average||Z-score|
|BB Biotech (BION)||-1.9||-16.1||2.9|
|Sequoia Economic Infrastructure Inc (SEQI)||10.6||7.0||2.9|
|Athelney Trust (ATY)||4.9||-8.1||2.5|
|Martin Currie Global Portfolio (MNP)||1.2||-0.4||2.2|
|Independent IT (IIT)||5.6||-4.2||2.2|
|Schroder Global Real Estate (SGRE)||-2.4||-6.9||2.1|
|BlackRock Income & Growth (BRIG)||0.3||-1.5||2.0|
|Axiom European Financial Debt (AXI)||14.6||6.8||1.9|
|North Atlantic Smaller (NAS)||-15.2||-19.2||1.9|
|Burford Capital (BUR)||77.2||44.6||1.7|
|Phaunos Timber (PTF)||-29.4||-36.1||1.7|
|Reconstruction Capital II (RC2)||-23.3||-42.4||1.7|
|Industrial Multi Property Trust (IMPT)||-40.4||-60.7||1.7|
|European Real Estate (ERET)||-16.9||-35.1||1.6|
Source: Numis Securities
That’s all I’ve got time for but as a parting shot I should quickly highlight the appearance of Aurora (ARR ) in our second table of ‘expensive’ trusts.
It wasn’t so long ago that Aurora was the worst performing trust in the country. However, times are changing at this underperforming minnow under new manager Gary Channon of Phoenix Asset Management and the shares now stand at a modest premium to NAV. I met Channon this week and will write up my interview with him next week.
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- Dolphin Capital Investors Ltd
- Third Point Offshore Investors Limited GBP
- Toro Ltd
- BB Biotech AG
- OldCo Ltd
- Burford Capital Ltd
- Reconstruction Capital II Limited
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Look up the investment trusts
- Blackstone/GSO Loan Financing (Ordinary Share)
- Scottish Mortgage (Ordinary Share)
- Law Debenture Corporation (Ordinary Share)
- City of London (Ordinary Share)
- Fidelity European Values (Ordinary Share)
- Aberdeen New Dawn (Ordinary Share)
- Witan (Ordinary Share)
- Schroder UK Mid Cap (Ordinary Share)
- Baring Emerging Europe (Ordinary Share)
- Majedie Investments (Ordinary Share)
- Princess Private Equity (Ordinary Share)
- AEW UK REIT (Ordinary Share)
- Sequoia Economic Infra Income (Ordinary Share)
- Athelney Trust (Ordinary Share)
- Martin Currie Global Portfolio (Ordinary Share)
- Independent (Ordinary Share)
- Schroder Global Real Estate (Ordinary Share)
- BlackRock Income and Growth (Ordinary Share)
- Aurora (Ordinary Share)
- North Atlantic Smaller Cos (Ordinary Share)
- Phaunos Timber (Ordinary Share)
- European Real Estate IT (Ordinary Share)
- Foreign & Colonial Investment Trust (Ordinary Share)
- Murray International (Ordinary Share)
- Lindsell Train (Ordinary Share)
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by David Kempton on May 24, 2016 at 17:15