Aberforth Smaller Companies, Aurora Investment Trust and Chelverton Growth Trust are among the four UK equity investment trusts which have achieved top-quartile total returns over three years, but which are trading on double-digit discounts to their net asset value, according to FE Fundinfo and AIC data.
UK equities have been out of favour during recent years, due to a torrid combination of political uncertainty, residual bruising from the pandemic, stubbornly higher inflation and former Prime Minister Liz Truss’s ill-fated mini budget.
However, times of sentiment weakness can often provide opportunities for stockpickers. And, in turn, this provides opportunities for fund buyers – particularly in the world of investment trusts where outperforming portfolios can also trade on discounts to NAV.
Performance data from FE Fundinfo and discount data from the Association of Investment Companies found that, over three years and across the three IT UK equity sectors, just four investment companies have achieved top-quartile returns and are currently trading on double-digit discounts. Portfolio Adviser has taken a closer look at the trusts below:
Crystal Amber Fund – 38.5% discount (winding down)
Trading on the largest discount on the list, the £84.5m Crystal Amber fund has returned 58.9% over the last three years, outperforming its average peer in the IT UK Smaller Companies sector by 39.7 percentage points. Founded in 2008, the AIM-listed activist trust invests mostly in small- and mid-cap UK equities, with the aim of increasing shareholder value through engaging with its holdings.
However, the trust is in the process of winding down, with 51% of shareholders voting for the continuation of the company at its 2021 AGM, when a minimum of 75% were required.
While the wind-up was originally estimated to complete at the end of this year, the company has reinstated its management fee for 2024 and beyond. A share buyback programme is likely to be introduced at its next AGM this month, according to a note from its chair last month, in order to narrow its discount.
Chelverton Growth Trust – 37% discount
The £3m Chelverton Growth Trust invests in AIM-listed companies with market caps of up to £50m, which managers David Horner and David Taylor believe are ‘at a point of change’. They will also invest in private companies, if they believe those companies are likely to float onto the AIM or if the investee company will be sold.
The trust currently only holds four companies: Chelverton Equity Partners itself, which accounts for more than two-thirds of the portfolio; mobile computing solutions provider Touchstar at 21.2% of the fund, educational platform provider La Salle Education at 8.1% and security system provider Petards at 3%. It has returned 23.2% over the last three years compared to its average peer’s gain of 19.1%. Its longer-term performance has been less favourable, however, having fallen by 38.9% and 16.9% over five and ten years, respectively.
Aberforth Smaller Companies Trust – 15.2% discount
Launched in 1990, Aberforth Partners’ £1.2bn trust is managed by six managers: Jeremy Hall, Euan Macdonald, Sam Ford, Christopher Watt, Rob Moncrieff and Peter Shaw. Benchmarked against the Numis Smaller Companies index, the trust has a diversified portfolio of 78 small quoted companies and an active share of 75.6%. Its largest individual holding is bus and rail operator FirstGroup at 3.3%, business publishing and training firm Wilmington at 2.9%, and ceramic materials manufacturer Morgan Advanced Materials at 2.6%.
Over three years, the trust has returned 45.7%, comfortably doubling its sector average. Given its benchmark, the investment companies will typically hold firms with market caps of up to £1.6bn – its largest current constituent – although this is subject to change if there are any reshuffles in the index.
Aurora Investment Trust – 10.9% discount
The only top-performing trust in the UK All Companies sector to trade on a double-digit discount, Aurora Investment Trust aims to provide both capital and income growth, with a three-year total return of 27% and a dividend yield of 1.5%, with dividends paid on an annual basis.
Manager Gary Channon invests in a highly-concentrated portfolio of stocks, with its largest holding – Frasers Group – accounting for more than a fifth of the trust. It also has 14.6% in Barratt Developments, 14.4% in Castelnau Group, 7.2% in Ryanair and 5.9% in US streaming giant Netflix. Overall, its top ten holdings account for 88.5% of the company’s underlying portfolio.
Channon believes there are six key factors investors should focus on when evaluating a business model: how much capital it requires; how sustainable its return is on that capital; how much capital needs to be retained versus returned to shareholders; the sustainable return on margin capital retained; the length of time he can reasonably estimate the company’s success; and the behaviour of those managing the company.