Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a577293

Investment trusts: where to play discounts right now

Oriel Securities has put out a list of ten investment trusts the broker believes look technically 'expensive' and another ten that emerge as 'cheap'.

 
Investment trusts: where to play discounts right now

As global markets pause for breath after one of the best first quarters in recent memory, Oriel Securities has put out a list of ten investment trusts the broker believes look technically ‘expensive’, and another ten that appear ‘cheap’.

Here’s Oriel’s list, published last week and based on the level of discounts or premiums the trusts' shares are trading at compared to the value of their investment portfolio.

A discount is where a trust's share price is lower than the net asset value per share of its investment portfolio. A discount at the upper end of its normal range can indicate a buying opportunity as investors can access the portfolio for less than it is worth.

A premium is where a trust's share price is higher than the net asset value per share of its investment portfolio. A premium at the upper end of its historic range can indicate a good selling opportunity as new investors are effectively overpaying for the trust's assets. A premium shows the trust's shares are in demand with investors.

Click on the links in the table to see a Citywire Money fact sheet on each of the investment trusts. These show how the trusts have performed in recent years.

‘Cheap’ investment trusts    
Name Discount (-) / premium (+) 6-month discount / premium range
Invesco Asia Trust -9% 11% to 5%
Fidelity European Values -14% 15% to 10%
Alliance Trust -15.4% 16% to 13%
Fidelity China Special Situations -4% 6% to 5% prem.
British Empire Securities -10% 10% to 1%
Fidelity Asian Values -8% 12% to 3%
RCM Technology Trust -14% 5% to %2 prem.
Merchants Trust +4% 1% prem. to 12% prem.
TR Property Investment Trust -13% 14% to 1%
Artemis Alpha -8% 11% to 4%
‘Expensive' investment trusts    
Name Discount (-) / premium (+) 6-month discount / premium range (%)
Blackrock Commodities Income +5% prem. 6% to 4% prem.
European Investment Trust -12% 18% to 12%
Scottish Oriental Smaller Cos +1.5% 11% to 1% prem.
F&C Global Smaller Cos +2.5% 4% to 5% prem.
Schroder Japan Growth -10% 16% to 9%
BlackRock Smaller Cos -14% 19% to 13%
Shires Income +4% 5% to 6% prem.
JPMorgan Smaller Cos -18% 23% to 16%
World Trust Fund -8% 13% to 7%
Aberdeen All Asia -10% 17% to 10%

Source Oriel Securities

(continued) Alliance Trust is one of the most prominent names on the list, after its repeated tussles with activist investor Laxey Partners over the gap between its share price and NAV.

Tom Tuite Dalton, analyst at Oriel, pointed out in the note that the £2.2 billion trust continues to shrink as buybacks continue apace, pushing up its costs but failing to narrow the discount, which is close to its widest in six months. But he stressed that this did not make the trust – on which Oriel has a ‘negative’ rating – a buying opportunity.

He also noted that Scottish Oriental Smaller Companies, a Citywire Selection pick, has moved to a premium on the back of strong NAV performance and growing retail demand.  Indeed, in the past three months, the trust’s NAV and shares have added 15.9% and 26% respectively, beating an 11.5% gain by its benchmark stock index, the MSCI Asia Pacific Ex Japan.

Simon Moore, analyst at BestInvest, said these returns do not necessarily make the trust expensive. ‘Is it expensive or will it be getting more expensive?’ he asks. ‘I think people still want to have exposure to Asia, so I certainly wouldn’t be advising clients to sell that one.’

He said Invesco Asia does appear undervalued at an 11% discount, noting that if investors seek exposure to Asia, Invesco is well placed to provide it due to its experience in the region. ‘Buy now when it’s almost as cheap as it’s been for the whole year,’ he said.

The analyst said he would add Worldwide Healthcare Trust to the list of cheap trusts, pointing to its discount of 8.4%, somewhat wider than its average level of 7.2%. He noted that the trust’s management had a strong team that ‘live and breathe’ pharmaceutical research.

‘They don’t have advance, inside knowledge about which drugs are about to get approved, but they speak to the drug trialists, and they, “well, this one’s going really well,’ Moore said. ‘So I think they’re going to be ahead of the curve in finding stocks that do well.’

He added that by playing discounts, investors could add extra value to their portfolios. ‘If you want to have exposure to say, Japan, you can go and buy a tracker; you can buy unit trusts; or you can buy an investment trust at a discount, Moore said. ‘You should get the double whammy – if you believe Japan will perform – of the performance of the underlying fund, plus the discount narrowing.’

21 comments so far. Why not have your say?

tom tuite dalton

Mar 29, 2012 at 12:18

Just to be clear, the funds in the list are not ones we believe are expensive or cheap necessarily hence the use of inverted commas in the table and in our original document. They are thrown up as a result of technical analysis but there is often a good reason why one trust might move to a premium and another languish on a discount. Alliance Trust is a case in point and we continue to rate it NEGATIVE on the back of its uninspiring long term record. Conversely, Scottish Oriental Smaller Companies Trust has a stellar track record and we believe its premium to NAV is merited and we continue to rate it as POSITIVE.

report this

Keith Cobby

Mar 29, 2012 at 14:30

Alliance Trust has raised its dividend for the last 45 years, one of a handful of trusts to do so. This doesn't seem uninspiring to me.

People who worry about discounts/premiums should stick with OEIC/unit trusts.

Technical analysis is for the trader/speculator, and is not something the long term 'snowball' investor needs to concern themselves with.

report this

Mickey

Mar 29, 2012 at 16:41

Yes it is worthwhile the average investor being aware of the discount/premium picture as getting in at will enhance your compounded returns, this is even more so for the long term investor. A little surprised to see Caledonia not mentioned as that one represents an excellent discount if you're willing to take the risk.

report this

john kenny

Mar 29, 2012 at 16:55

Albany looks interesting.

Respected management, 20% + discount to NAV, 4% dividend and long record of increasing the dividend too. Small enough to be agile.

Presumably not on this list as the discount looks longstanding. In theory at least it could reduce because income trust seem otherwise to be at par or on a premium.

report this

William Phillips

Mar 29, 2012 at 17:25

Keith Cobby: "Alliance Trust has raised its dividend for the last 45 years, one of a handful of trusts to do so. This doesn't seem uninspiring to me."

The rises are nominal and small, contrived to give the semblance of a secure income while in real terms it falls.

ATST's dividend has lost purchasing power from the previous financial year six out of the past ten times. Its share price has fallen by 1.8% pa compound in real terms over the same decade. Worst of both worlds.

report this

Linda Rushmore

Mar 29, 2012 at 19:27

I completely agree with the comments above. Scottish Oriental Smaller Companies has featured in my quite extensive portfolio as one of my best performers over the last 3 years. I also hold Caledonia which is really an investment vehicle for the Cayser (sp!) dynasty. It performed admirably during the period 2001 to 2006 but has been an 'also ran' subsequently. I also hold Albany IT. Go to 'Trustnet' and check on the constituent holdings of this trust and you will find little difference from those holdings of larger, well regarded Income Investment Trusts. The dividend is excellent, and should the discount (at last) reduce, as it most certainly should on the introduction of new legislation and I think anyone investing now must be confident of an immediate gain in their fortunes.

report this

Westwinds3

Mar 30, 2012 at 12:06

When I first invested in Alliance Trust nearly 20 years ago it was on a wide discount, but its management expenses were the lowest in the business. This meant that by buying the trust, I owned more shares than if I had bought them directly. Moreover, the dividends on those extra shares more than covered the management expenses. In effect, I was being paid to have an active manager. This seemed a decent bargain to me.

20 years ago, performance was boring but safe. Since then, Alliance management expenses have increased about 4-fold, without any obvious improvement in performance. Its expenses are now about average.

I couldn't find a published figure for Albany IT total expense ratio, but I calculate it as about 1.4%. With a 20% discount and 4% dividend, I calculate you are still paying about 0.65% for the privilege of having Albany manage your money. If you do the same calculation on discounts and dividends, probably City of London or Temple Bar are charging you less, and some trackers less still.

report this

No name 2

Mar 31, 2012 at 11:38

As a long time holder of Alliance IT, I agree it's performance has been disappointing but I approved it's policy of playing safe and maintaining very low charges i.e. 0.3 % TER. This has now more than doubled to 0.65% TER without any improvement in performance. In spite of this the present Chief Executive's package seems to have risen to over One Million pounds, and it seems to have changed it's old policy by losing it's uniqueness of having the very cheapest charges, and coming more into line with other Funds, broadening it's product range, increasing spend on Marketing etc,

report this

Lairdolossie

Mar 31, 2012 at 12:15

If Alliance Trust has been performing so poorly in recent years why is the yield so low? Are shareholders relunctant to sell? If so, why?

report this

dereklkl;l hdjkaK;LL'a

Mar 31, 2012 at 18:57

Lairdolossie - Apathy/Ignorance I suspect!!!

report this

hilhames

Mar 31, 2012 at 22:12

am trying to get a grasp of ITs Are you saying that if a trust is on a premium of , say, 5%, you get 5% less shares for your money than if there was no discount/premium? So you actually are paying more for each share that you hold than the price that is shown as the price the IT is trading at on LSE?

report this

john_r

Apr 01, 2012 at 22:51

@ hilhames - there is only one price - the LSE price. When an IT is in demand (for example because it consistently performs well) this price rises and sometimes it rises above the value of the individual shares it holds (above the cumulative NAV). This is then known as being at a premium. Many investors, myself included would hesitate at paying a premium price but obviously a continually well performing trust may be worth a premium. Conversely most I.T 's seem to trade at discount meaning the price is lower than the NAV of its individual holdings. Sounds like a bargain - be careful as a large discount means an unpopular share and there is usually a good reason.

Comments above talk of Alliance Trust IT which under its present management seems to have increased it fees dramatically over the years but for no real performance benefit hence its discount increases as it becomes increasingly viewed as poor value. Trusts are able to influence their discounts for example if the discount gets too high they could use some of their funds to buy their own shares then cancel them. The result is that there are now less shares so the value of each increases reducing the discount. Some consistently successful ITs such as Personal assets who trade at a premium do the opposite and issue more shares which temporarily reduces the value of each share and hence reduces the premium.

The really good thing about all of this is that everything is transparent with Investment Trusts as being public companies they have to account for all sales and revenue, expenses etc just as any other PLC company would.

report this

hilhames

Apr 01, 2012 at 23:10

john -r

thanks, I too thought there was only one price, but people often talk about getting more for their money ie as though they were getting more shares because of a discount.

report this

john_r

Apr 02, 2012 at 10:50

Hhames .... If an IT is trading at a discount then YOU ARE getting more investments for your money. More IT shares means more of the shares held within the IT. You are now buying these investments collectively cheaper than you could buy them individually outside of the IT - or put it another way - getting

more shares for your money because of the discount.

But while you do get more for less when buying you also get less for more when you sell for a net zero balance unless of course the discount changes while holding the IT.

report this

hilhames

Apr 02, 2012 at 15:29

I see what youare saying but its just telling you more about performance of the IT and the sector isnt it You are not actually getting more or less shares in the IT - that is what I was worried about when i asked the question. If a trust is constantly on a high premium eg Murray Investment Trust its really ok isnt it to buy for a premium?

Can you see anywhere eg Morningstar, how a discount/premium has changed over a period of time for an IT?

report this

john_r

Apr 02, 2012 at 23:44

Hhames, Sorry, I don't know of any site giving historical discounts.

The hare and the tortoise springs to mind when looking at MYI historical performance. An average trend around 12% pa since 2005 has built up into am impressive performance recovering from all the wobbles along the way. It obviously ticks boxes with some investors. I bet Alliance Trust would die for that performance but for me the 6.9% premium is too hard to swallow.

There is no pleasing everybody.

report this

hilhames

Apr 03, 2012 at 01:19

6.9%? I think that might be down a bit - I have something kept from IC when they recommended it in spite of the premium - could be wrong, I will look!

report this

Amos

Apr 04, 2012 at 21:24

@hilhames and john_r. If you click on the graph on the trustnet page for a trust it goes to a page with more detail, including - lower down - a graph of the historical discount. really useful.

report this

john_r

Apr 04, 2012 at 22:09

Thanks Amos, I've been using Trustnet for about 8 years and hadn't spotted that one.

report this

Hilary hames

Apr 04, 2012 at 23:56

Yes, thanks from me too but I was looking for (say) quarterly figures , I don't suppose its anywhere unless on the actual Investment Trust website and unlikely.

report this

Rory

May 11, 2012 at 06:06

Once the staid but predictable Grand Old Lady of Dundee, Alliance Trust appears to have been hijacked by ritzy boutique fashonistas (not many of these on the east coast of Scotland) so other ITs with big discounts spring to mind -- Caledonia, Scottish Investment and Value and Income.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

More about this:

Look up the investment trusts

  • Invesco Asia (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Fidelity European Values (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Alliance Trust (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Fidelity China Special (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • British Empire Securities (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Fidelity Asian Values (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • RCM Technology Trust (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Merchants Trust (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • TR Property SIGMA (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Artemis Alpha Trust (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • BlackRock Commodities Income (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • European Investment (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Scottish Oriental Smaller Cos (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • F&C Global Smaller Companies (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Schroder Japan Growth (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • BlackRock Smaller Companies (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Shires Income (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • JPMorgan Japan Smaller Cos (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • World Trust Fund (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Aberdeen All Asia (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

More from us

Archive

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

How to stay Sharpe with investment trusts

by Gavin Lumsden on Jul 22, 2014 at 14:53

Sorry, this link is not
quite ready yet