As sector average discounts to net asset value (NAV) have widened significantly year-to-date, Winterflood Investment Trusts is encouraging the boards of investment trusts to be prepared to use share buybacks to alleviate discount volatility.
According to Winterflood, set against a difficult year for investors – with the FTSE All-Share Investment Companies Index down 17.1% year-to-date – the sector average discount has widened from 2.1% at the start of the 2022 to 8.0% today.
“While the majority of investment trusts have been de-rated so far in 2022, it is evident that a number of those that have enjoyed a strong retail following in recent years have been hit particularly hard hit in recent weeks,” says Simon Elliott (pictured), head of research at Winterflood.
Scottish Mortgage, which has remained popular despite the sharp rotation away from growth stocks, is currently languishing at a -3.6% discount, according to data from the Association of Investment Companies, while others, such as Polar Capital Technology and Alliance Trust have slumped 11% and 4.6% respectively.
However, while being wary of “catching falling knives”, Elliott believes the recent de-rating offers value opportunities for long-term investors.
“Indeed, we would not be surprised to see a number of buyback programmes pick up again after the current market volatility subsides, and some of these discounts will prove fleeting,” he adds.
While demand from retail investors has been one of the key drivers in the growth of the Investment Companies sector in recent years, for understandable reasons, Elliott says that it appears this trend is on pause.
“We believe that boards should be prepared to use buybacks to alleviate discount volatility, particularly after issuing shares in the recent past,” he says.
