Finsbury Growth & Income has conducted a second share purchase amid the coronavirus sell-off as discounts present a rare “arbitrage” opportunity to buy Nick Train’s strategy at a discount.
The board of the £1.5bn investment trust confirmed on Tuesday that it had bought back shares at a 6% discount of 655.5p. It is the second time during the coronavirus outbreak the trust has bought shares with the board confirming on 28 February it had purchased shares at 788p with a 3% discount.
The share purchase is rare for Finsbury Growth & Income, which usually trades at a small premium to its net asset value. Over the last year, its biggest discount was -2.73% in January while its premium peaked at 1.51% on 19 February, just before the coronavirus sell-off took hold, Association of Investment Companies data shows.
The investment trust was trading at a discount of 4.91% on Thursday evening.
Arbitrage with Finsbury Growth & Income
AJ Bell head of active portfolios Ryan Hughes says the discount could be an arbitrage opportunity for investors who normally hold Train’s open-ended equivalent, the Lindsell Train UK Equity fund.
“Where you’ve got mirroring strategies, there’s sometimes the opportunity to move between the two,” Hughes says. “The only thing to be wary of is trading costs.”
He also points out the NAV may quickly become stale during current market conditions because it is priced daily.
“It could be 24 hours out of date. And while in normal market conditions that probably doesn’t matter too much, right now where we’re seeing extreme market moves of 10% in a day then that could be very out of date.”
Does LTIT’s share price represent an enticing entry point?
Finsbury Growth & Income isn’t the only investment trust in the Lindsell Train stable offering a discount at the moment.
The Lindsell Train Investment Trust is trading at a 17% discount. That is significantly lower than the 99.5% premium it hit in May 2019.
Lindsell Train co-founder Michael Lindsell bought £43,000 on Monday and an additional £42,800 on Wednesday. The investment trust, which is managed by Lindsell, Train and James Bullock, is yet to purchase its shares amid the coronavirus sell-off.
“The trust was until not that long ago trading at an extreme premium to NAV, so at this discount the shares represent a very enticing entry point not so much as a short trade but for the longer term investor,” says Tilney managing director Jason Hollands.
Finsbury Growth & Income versus LTIT
Willis Owen head of personal investing Adrian Lowcock prefers Finsbury Growth & Income, describing it as the “purer” investment vehicle. “Finsbury Income and Growth has one of the strictest discount management policies there is and it is reassuring to see they are applying their policy even in such challenging times,” Lowcock says.
The board aims to keep the discount smaller than 5%.
In contrast, Lowcock points out the Lindsell Train Investment Trust has a significant exposure to one company: Lindsell Trust Limited represented 49.7% of the Lindsell Train Investment Trust at the end of January, according to its latest monthly factsheet. Its discount was 10.71% on Thursday evening.
“The discount is widely at the Lindsell Train Investment Trust but not so much so that it makes a clear case for investing in it. On balance I would go for Finsbury as it more diversified and less dependent on the profits of one, unlisted company.”
Open-ended versus closed-ended depends on investor expertise
Interactive Investor head of funds research Dzmitry Lipski says, for retail investors, the choice between open and closed-ended vehicles comes down to their level of confidence.
The Lindsell Train UK Equity fund features on the Interactive Investor Super 60 buy list. Lipski notes the Finsbury Growth and Income fund is very similar.
“The open-ended fund option is probably a simpler strategy and investors do not need to consider the complication of premiums or discounts of investment trusts. But more savvy investors could take advantage of current discount,” he says. Though he adds it is “anyone’s guess” when the current tumultuous market activity due to Covid-19 will end.
“Of course, some might think that the real opportunity lies with Lindsell Train Investment Trust, which has moved from a hefty premium, to a thumping discount. Experienced investors may recall Train was urging investors not to buy when it was on a whacking premium. Now it isn’t, it’s the obvious time to take a look.”
