There are, however, a number of closed-ended funds still trading on double digit discounts, and may well be of interest to the bargain hunters among you.
As FE Trustnet has repeatedly pointed out however, simply buying a trust on a discount doesn’t guarantee success, as many trade on discount ranges. Moreover, even if investors do find one that’s cheap on a historical basis, the performance of the underlying assets are still of huge importance.
With this in mind, we thought it would be a good idea to give our readers the opportunity to have their bargain investment trust-picks analysed by an industry expert.
Responses to this opportunity came thick and fast, with more than 30 investment trusts getting a mention. Demand is so strong that we’ll be writing a follow up piece to this article; so if you’re choice hasn’t been mentioned below, make sure you tune in later on this week!
Here are five of the most popular choices with you:
Caledonia Trust – 21.6% discount
Will Wyatt’s Caledonia Trust was the most popular choice with the bargain hunters, with one reader commenting: “it has reasonable performance, a yield of 2.8 per cent and a discount of over 20 per cent, but no one seems to like it.”
The trust has seen a change in management of late, which seems to have boosted performance.
Our data shows that trust has returned 26.44 per cent over the last 12 months, putting it ahead of its IT Global Growth sector average and FTSE All Share benchmark. Wyatt took over in mid-2010.
Performance of trust versus sector and index over 1yr
Source: FE Analytics
Charles Cade (pictured), analyst at Numis, agrees that Caledonia is one of the standout value plays in not only the IT Global Growth sector, but the entire investment trust universe as a whole.
"Yes, I think it is a good choice," he said. "The reason it's on such a big discount is because its performance has been rather dull, and people have been a little unsure about the manager's change in strategy."
"Wyatt has made the portfolio more concentrated and a little more focused, backing various themes and asset classes like global equity income and private equity. It was previously run by the family in an unconstrained manner, but now it is a little more structured." "Performance has been dull though it has picked up of late. As it's family run there hasn't been much protection of its discount, but as long as performance does continue to improve I'd say it's one that definitely offers decent value."
Cade points out that the trust's discount has come in significantly in the recent past and has gone out as much as 30 per cent, showing that it isn't constrained to a narrow discount-range. According to the AIC, the trust's one year discount average is just over 20 per cent, and has been as low as 16 per cent over that period.
The £991m trust has ongoing charges of 1.13 per cent, and is not currently geared.
Hansa Trust – 26% discount
The Hansa IT was another trust in high demand from our readers, thanks to its discount of well over 20 per cent.
The £267m trust was formerly one of the standout performers in its IT UK Growth sector, but has had a miserable time of late, achieving bottom quartile performance over a one, three and five year period.
Performance of fund and sector
| Name | 1yr (%) | 3yr (%) | 5yr (%) | 10yr (%) |
|---|---|---|---|---|
| IT UK Growth & Income | 29.39 | 54.96 | 74.2 | 158.36 |
| FTSE All Share | 18.93 | 34.48 | 61.79 | 135.83 |
| Hansa Trust | 10.19 | -0.73 | 13 | 223.64 |
Source: FE Analytics
It does have a better record against its benchmark – the rolling three year performance of the five year government bond yield, but given that the trust invests almost exclusively in equities, this performance measure is likely to be overlooked by most investors.
"This is another family-run investment trust, which does sometimes contribute [to a higher discount]," said Cade.
"It fell out of the All Share last year at the same time that it was going through a poor period of performance. Ocean Wilson which relies heavily on Brazilian shipping had a really bad time, and is a big part of the portfolio [34.3 per cent]."
"NAV performance hasn't been good, but at 26 per cent its discount does standout."
According to the AIC, the trust's discount is above both its one and three year historic average.
The Hansa Trust has ongoing charges of 0.92 per cent, and is slightly geared. It is currently yielding 1.2 per cent.
British Empire Securities & General Trust
The £750m British Empire Securities & General Trust, managed by John Pennink, is a large and liquid trust popular with many private investors. However, like the Hansa trust it has had a tough time of late, and is lagging its sector and benchmark over a one, three and five year period as a result.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
That said, with a discount of 12.7 per cent, some investors believe the trust is starting to offer compelling value.
Cade says that in spite of the trust's poor relative performance of late, he still rates the management team, and highlights Pennink's strong long-term record. FE data shows the trust has returned 170.93 per cent over the last decade
"It's definitely an interesting one," he said. "It has typically had expertise in holding investment trusts, but as there is a general lack of value in the sector at the moment he has moved towards holding companies instead."
"Some investors are a bit wary of his exposure to Europe and commodities at the moment, which is where he sees value. In that way the trust has a double discount, because these areas are themselves cheap."
"I'd say it's a good time to look at a trust like this, given that it has had a tough time of late," he added.
According to the AIC, the trust's discount is again above its one and three year average.
The British Empire Trust has ongoing charges of 0.7 per cent, but also charges a 6 per cent performance fee. It is yielding 2 per cent, and is only very slightly geared.
Value & Income IT – 10.8% discount
The Value and Income IT is the best performer on the list by some distance on a relative basis. Our data shows that managers Angela Lascelles and Matthew Oakeshott, who have managed it since 1986, have achieved top quartile performance in their IT UK Growth & Income sector over a one, three, five and 10 year period.
Over the last five years the fund has returned 116.04 per cent, compared to 74.2 per cent from its sector average and 61.79 per cent from its FTSE All Share benchmark.
Performance of trust, sector and index over 5yrs
Source: FE Analytics
In spite of this strong performance, the trust remains on a double digit discount, to the surprise of many of our readers.
“It has proven to be a good long term investment, but [it] trades at a substantial discount. I feel that a better understanding as to why [the trust] would be beneficial to ordinary retail investors like me,” said one reader.
Cade is a little more wary of referring to the Value & Income IT as a bargain, given that it's discount of 10.8 per cent is far narrower that it's historical average. According to the AIC, it has a one year average discount of more than 20 per cent.
He adds that the trust's unusual structure means that it is unlikely to be a mainstream choice.
"It has a half property, half equity portfolio," said Cade. "Property currently has a 30 per cent weighting or so."
"It's an oddity in that respect, and given that it's not yielding any more than a typical UK equity income fund, it's likely that investors will just stick to what they know."
Value & Income IT has ongoing charges of 1.43 per cent, but does charges a performance fee on top of that. It is yielding 3.2 per cent, and is heavily geared at 22 per cent. Cade points out that a lot of this gearing is "expensive" long-term debt - another reason why bargain hunters should be wary.
If you’re choice hasn’t been mentioned below, make sure you tune in later on this week for part two.
