The average investment trust in the Association of Investment Companies (AIC) has reached a discount of 9.6%, the lowest level in nearly four years.
The last time the average investment trust had a discount of less than 10% was August 2022, when the discount fell to 9.4%.
Average discounts have generally been in the double digits since September 2022, owing to higher interest rates, regulatory issues regarding cost disclosures and the dominance of larger US tech companies. During this period, the average discount peaked at 18.8% in October 2023.
Richard Stone, chief executive of the AIC, said: “It has been a challenging period for investment trusts, but there is light at the end of the tunnel.
“While the challenges are not over yet, it’s encouraging to see that the average industry discount is now back in single digits.”
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Annabel Brodie-Smith, communications director at the AIC, said: “Nearly 250 investment trusts make up that average discount figure, and it is size-weighted, which means the size of the investment trust is taken into account when calculating the average discount.”
Going under the bonnet, there was still significant variation between different sectors and investment trusts.
“The Property – UK Residential sector is trading on a discount of -37.4%, as performance and sentiment have been affected by the high-interest rate environment,” according to Brodie-Smith.
Indeed, the widest discount in the AIC universe was a property trust, Macau Properties Opportunities, which traded at a 77% discount to net asset value (NAV). It has fallen by 74.2% in total return terms over the past 12 months, according to AIC data.
William Heathcoat Amory, managing partner at Kepler Partners, added: “[The] trusts trading on the widest discounts are all perceived as ‘old-economy’ [or just not potential AI beneficiaries], or just in hard-to-value private assets and potentially over-geared.” This is the case for Macau Property opportunities, which is a hyper-specialist trust that is effectively in wind-up, according to Amory.
That said, trading at a substantial discount did not necessarily prevent trusts from delivering a positive return. An example of this is flexible investment trust Tetragon Financial Limited, which trades on a 70% discount to NAV, the third widest in the AIC universe. According to data from FE fundinfo, the trust has delivered a 57.2% total return over five years, a top-quartile result versus the IT Flexible investment sector average of 24.7%. However, it has slipped into the bottom quartile over the past 12 months.
Brodie-Smith said: “This is because it has a complex portfolio which invests in alternative strategies and managers and has an unusual governance structure where the listed shares are non-voting shares.”
By contrast, roughly 28 investment trusts are trading on a premium, according to the AIC, but some of these premiums could be extreme.
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At the top end of the chart, JPMorgan Emerging Europe, Middle East and Africa Securities trades on a staggering 294% premium versus NAV. According to AIC data, it is up just 6.4% over the past decade.
“This is because the trust’s board has written off the value of its Russian holdings, but the market thinks the Russian holdings have value so there has been demand for the shares,” Brodie-Smith said.
The next widest premium was 62.7% on the Seraphim Space investment trust, which allocates to early and growth-stage private space tech companies.
Over the past one and three years, it was the single best-performing trust in the IT Growth Capital sector. It has delivered a 525% return over the past three years, beating the sector average by nearly 400 percentage points.
Premiums then slip to 17.6% on Baillie Gifford’s Schiehallion fund, another IT growth capital offering. The fund has benefitted from a high allocation to SpaceX, expected to be one of the most popular IPOs on the market when it goes live.
Over the past 12 months, the trust has risen more than 110.2%, beating the sector average by more than 50 percentage points.
Kepler’s Amory added: “In terms of premiums, there are areas of what might be described as “irrational exuberance”, such as Space technology.
“In fact, nearly all of the trusts on a premium to NAV of greater than 2% currently have SpaceX as a significant holding.” Enthusiasm, then, looks fairly focussed around a fairly narrow sector and set of opportunities, the Kepler analyst said.
By contrast, James Carthew, head of investment companies research at QuotedData noted that while some trusts are trading at premiums due to the SpaceX and Anthropic IPOs, the NAVs could have room to run.
“SSIT’s NAV may be understated – there is so much M&A and new contract wins going on within its portfolio that it is hard to know what the real value might be,” he said.
“If the IPOs get away at the levels being discussed, there could be big upside in their NAVs.”
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