UK income and small-cap trust discounts halve in 2024

Discounts on UK income and smaller company trusts have halved in the first six months of the year, according to a new report by Stifel.

Strong performance from UK equities over the period encouraged investors to buy them again, which in turn shrank their historically wide discounts.

The FTSE 100 shot up 7.9% in the first half of the year – the same return it delivered throughout the whole of 2023, and with far less volatility.

Stocks may be soaring, but they are still trading far below other markets, which has investors finally “waking up to the undervaluation of UK equities”, according to authors Iain Scouller, William Crighton and Sachin Saggar.

Renewed interest in the UK saw the likes of Aurora shrink their discounts by nine percentage points in just six months, dropping from 12% to 3%.

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Other UK-dedicated trusts such as Henderson Smaller Companies, BlackRock Smaller Companies and Dunedin Income Growth, also saw their discounts drop seven, six and five percentage points respectively over the period. Elsewhere, the City of London investment trust even ended the first half of the year at a 2% premium.

The report noted that the trust was renowned for regularly issuing equity, which Scouller, Crighton and Saggar expect to happen again over the coming weeks if it continues to trade at a premium.

However, trusts investing in Asian and emerging market equities have struggled to shake off their steep discounts this year.

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Investment companies such as Utilico Emerging, JPMorgan Japan Small Cap Growth & Income, and Fidelity China Special Situations each dropped their discounts by a modest one percentage point over the first six months of the year. Their share prices entered the latter half of 2024 at 15%, 13%, and 10% below their net asset values.

UK income trusts to have seen the most positive rerating over six months