Investors have ‘plenty of opportunities’ to participate in the investment trust sector’s recovery as discounts begin to narrow in the alternatives space, according to Peel Hunt’s latest sector outlook.
Analysts Markuz Jaffe and Anthony Leatham said that while it has been well observed that discounts are wide across the investment trust universe, historical context is important.
Peak troughs for discounts occurred in March 2003, December 2008, December 2011, June 2016 and October 2023, with discounts ranging from 9 to 19% at their widest point.
The analysts said: “If we consider the drawdown recovery – the period between the trough discount and recovery to the previous high watermark – we see the average recovery period is 25 months. So, we have a long way to go and investors have plenty of opportunity to participate in our view.”
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Rate cuts could be a catalyst
In the current cycle, investment trusts hit a peak discount in October 2023 at 19%. Today (8 April), the average trust trades at an 8.8% share price discount, according to the Association of Investment Companies.
The Peel Hunt analysts argue that while there are stock-specific and fundamental reasons for discounts to be as wide as they are, the catalyst for narrowing in the alternatives sector lies with central banks.
“Any movement in the risk-free rate should reverberate through the alternatives, particularly the yielding strategies in renewables and infrastructure. While we do not want it to be ‘all about the macro’, the reality is that the first leg of discount narrowing is likely to be reliant on that one factor,” Jaffe and Leatham said.
In particular, the Renewables – Diversified sector could be in line for a re-rating. The average discount had widened to approximately 33% from a 12-month average of 20%.
Jaffe and Leatham said: “We see significant value in this sector, particularly if government bond yields start to normalise and the dividends delivered by this sector present an even more pronounced yield premium.”
“Following two dividend cancellations and extremely volatile share price activity, we have been looking closely at the battery storage specialists. Revised revenue curve assumptions and revenue levels suggest near-term NAV reductions,” they added.
“However, we see recovery potential for the sector. Gresham House Energy Storage fund is our preferred pick in the sector and it has certainly experienced a challenging few months with YTD share price total return at -62% and a very wide discount.”
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