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Top Trusts: how I found five investment trust bargains
Gavin Lumsden shows a way of identifying interesting equity investment trusts trading on cheap valuations (or discounts to net asset value).
Buying investment trusts when their shares are cheap and trading at discounts below their net asset value can be a good way to make money. The trouble is there aren’t as many cheap trusts as there used to be and buying trusts on discounts often means buying them when they are out of favour or underperforming.
Using analysis from Winterflood Securities this video shows one way to sift through all the equity investment trusts in search of cheap trusts that could be poised for a turnaround and a re-rating.
Can't watch now? Read my script
Hello I’m returning to the subject of investment trust discounts to show how you can find potential bargains in investment trusts investing in equities – or shares – today.
To recap: a discount is when an investment trust share price trades below its net asset value.
Buying investment trusts when their shares are cheap in this way can be a good way to make money. The trouble is there aren’t as many trusts on discounts as there used to be.
Analysis by Winterflood Securities shows over a third of investment trusts trade on premiums which are the opposite to discounts when an investment trust share rises above its net asset value as a result of investor demand.
In 2008, before the financial crisis, only 14% of investment trusts were expensive in that way. At the end of October there were 35%.
Still that leaves us with 200 trusts on a discount of some sort. We can turn Winterflood’s analysis on premiums on its head to help us sift through them all.
According to the firm the main characteristics of equity investment trusts on premiums or narrow discounts are:
Many are equity income funds – popular because of the high yields they offer when interest rates are low. Some have zero discount policies to prevent their shares falling to a discount. Others are recent launches. Many are good performers. Or have benefited from being in a fashionable sector. Sometimes a change in fund manager or investment approach has boosted their appeal.
As we’re hunting for discounts we can reverse all those traits and look for: trusts that invest in equities, but aren’t UK equity income or older than five years, don’t have zero discount policies and have performed poorly and had a recent manager change.
So we drop trusts investing in debt, infrastructure, hedge funds and bricks and mortar. We also say goodbye to private equity trusts even though there are big discounts in this sector that look interesting.
We cut all UK Equity income trusts apart from three on big discounts. We ignore trusts launched in the past five years. We set aside trusts with zero discount policies. And we exclude all trusts that have beaten their benchmark stock market index over five years.
That leaves us with 75 old, underperforming investment trusts. There are lots of potential opportunities here: for example, distressed mining trusts for the brave, contrarian investor.
But we’re going for one final cut to focus on trusts that have had a change in fund manager or investment approach since January 2014 and which still remain on a big discount.
That leaves us with just five trusts. They are the Monks and Scottish investment trusts in the Global Growth Sector, Aberdeen Japan, Invesco Asia and Templeton Emerging Markets. All are worth further consideration.
My current favourites are Monks where the new manager Charles Plowden is turning it into a ‘best ideas’ fund for Baillie Gifford, the investment group he works for. Recent performance appears to be improving but this hasn’t been reflected in the shares much which trade at a 12% discount to net asset value.
I also fancy a punt on Carlos Hardenberg turning round Templeton Emerging Markets. He’s just taken over from Mark Mobius so there’s no sign of improved performance. I have to say the analysts I’ve spoken to aren’t convinced so it’s just a hunch.
Hunch or no hunch, I hope you’ve found this useful as you look for the next investment trust bargain.
More about this:
Look up the investment trusts
- Monks (Ordinary Share)
- Scottish Investment Trust (Ordinary Share)
- Aberdeen Japan (Ordinary Share)
- Invesco Asia (Ordinary Share)
- Templeton Emerging Markets UK (Ordinary Share)
More from us
- A Top Trusts' guide to investment trust discounts
- Top Trusts: my winners and losers in the crash
- Top Trusts: how I beat the All Share!
- Top Trusts Review: the final cut
From the Forums
by Daniel Grote on Sep 29, 2016 at 10:23