Bargain trusts for the adventurous investor
For those willing to embrace the volatility, private equity trusts trading on discounts as high as 30 per cent could be an appealing prospect.
Bargain hunters should look to private equity investment trusts
trading on considerable discounts to net asset value (NAV), according to Winterflood Securities’ James Brown.
Brown, an investment trust specialist at the firm, says there has been little movement in the discounts of many private equity portfolios, even though they have performed very well of late.
“There are obvious sectors out there where discounts are attractive; however, one that investors should definitely look into is private equity,” he said. “It has performed well recently and in general terms, the discounts have tightened, but not considerably.”
Performance of sector over 1yr
Source: FE Analytics
“The average discount of direct equity [private equity] trusts is at around 20 per cent at the moment.”
Brown recommends a number of portfolios in this area that investors may wish to look into. However, it should be noted that private equity trusts are historically very volatile and are susceptible to heavy losses during down periods. In 2008 alone, the average private equity trust lost 50 per cent, and in spite of a strong 2009 and 2010, the sector is still down over five years.
Naturally, this has put a lot of investors off private equity trusts, but Brown thinks they’re a good value play for those willing to take on the volatility.
“The trusts investors should be looking at really depends on their individual time frames,” said Brown. “We like the Electra
ITs, though the [latter] has historically traded at a tighter discount than its sector average,” Brown said.
“The Electra trust has performed very well recently and is trading on a 23 per cent discount.”
According to FE Analytics
, Electra Private Equity has outperformed its sector and FTSE All Share benchmark over a one, three and 10 year period. It’s only fallen slightly short of the All Share over five years, in spite of a tough 2008.
The performance of the HgCapital IT is a little more mixed, however. Its returns are well above its sector and benchmark over five and 10 years, but it’s down 5.4 per cent over one year, and has underperformed over a three year period as well.
Performance of trusts, sector and index
Source: FE Analytics
|| 1yr (%)
|| 3yrs (%)
|| 5yrs (%)
|| 10yrs (%)
| HgCapital Trust
| Electra Private Equity
| IT Private Equity
| FTSE All Share
The trust is currently trading on a discount of 16 per cent.
Brown also highlighted a fund of funds in the sector, which he thinks is a good way for investors to diversify the risks inherent in private equity.
“Private equity fund of funds such as Graphite Enterprise
, Standard Life Euro Private Equity
and Pantheon International
are looking good at the moment,” he said.
“The discounts have come in from around 40 per cent and are now at around 30 per cent, so they’ve only tightened slightly.”
In a recent FE Trustnet
article, Oriel Securities’ Iain Scouller said that the UK small and mid-cap sectors are also a bargain area investors should be looking at.
Brown says certain income-focused sectors, which are understandably in high demand in the current low interest rate environment, are looking on the expensive side however.
“Infrastructure is the obvious sector in this respect,” he said. “The sector has an average premium of around 8 per cent. With investors looking for yields of 4 per cent to 6 per cent, they need to know what they are buying into.”
“There is also the UK equity income sector which is trading on a premium. The sector has done well, but the discounts haven’t really come in since the start of the year, and stayed around NAV.”
According to data from the AIC, the average trust in the IT UK Growth & Income sector is trading on a premium of 0.1 per cent.