Many investors prefer to buy into things when discounts are wider than historic averages to give themselves extra protection.
The thinking is that discounts are likely to narrow and give a boost to returns, and unlikely to widen further.
The trust-picks of our readers suggest many are looking at some out-of-the-way corners of the sector to find bargains. We asked the experts to analyse their choices.
Geiger Counter
One reader has been eying up Geiger Counter, a specialist uranium mining trust that is on an 11.5 per cent discount.
The trust has risen 30.73 per cent in share price terms this year, as the mining sector has rebounded.
Performance of trust vs sector in 2014
Source: FE Analytics
However, the trust is still very far off its peak in terms of price. It was hit by the financial crisis and then the collapse in the mining sector, but the Fukushima disaster in Japan has also presented a serious headwind for the trust.
Performance of trust vs sector over 5yrs
Source: FE Analytics
“It’s been very good this year but terrible before,” said Monica Tepes, investment companies analyst at Cantor. “It’s trading at around 30p when it has been around 120p.”
The Japanese government has become more positive about the future for nuclear power in the past few months, having appeared to be setting a different course after the Fukushima disaster. Tepes (pictured) suggests this is behind the recent re-rating.
The fund exclusively buys uranium miners, which makes it a bet on that one sector, she explains. “If you are looking for risk, it’s something that could go up two or three times,” she said. “And from a technical point of view it has rarely been as depressed as it is now.”
One issue for investors to be aware of is that the trust faces a continuation vote at its AGM in March 2014. With the discount narrowing, it will be interesting to see shareholders' views.
The trust has a market cap of just £24m. It reduced its charges in January and the annual management fee is now 1.375 per cent.
Hansa Trust
Another one of our readers is wondering if there is value in Hansa Trust, a UK All Companies trust sitting on a 24.8 per cent discount.
The major reason for this discount is the fund’s top holding in unquoted Brazilian logistics company Ocean Wilsons, Tepes says, which makes up 34 per cent of the portfolio.
The trust also holds Experian in its top 10, a company that has been rapidly expanding into Brazil.
“Brazil has been out of favour and nobody is raving about it,” Tepes said. “If that was to come through, that might improve the rating.”
“However, you have to take a view on Ocean Wilsons,” she warned. “The reason it’s still on a 25 per cent discount is because of stock-specific risk.”
Over three years the Hansa Trust has been more or less flat as the average UK All Companies trust has made 47.18 per cent.
Performance of trust vs sector over 3yrs
Source: FE Analytics
Gas company BG Group is another top-10 holding, making up 3.2 per cent of the portfolio. This could provide a headwind for the trust in the coming months as the company cuts jobs in the UK in a bid to handle dwindling production.
Ongoing charges on the trust are 0.92 per cent.
Henderson Opportunities
Another of our readers is looking at the £74m Henderson Opportunities Trust, managed by FE Alpha Manager James Henderson.
The trust is less well-known than his Lowland portfolio, and has a higher weighting to the mid and small caps, along with a higher-conviction approach. It is still on a discount of 2.7 per cent, which has come in over the past year.
The trust has done exceptionally well since the financial crisis, and Henderson told FE Trustnet last week how being able to buy good businesses on the cheap at that time helped him.
In price and NAV terms, it is the leading UK All Companies trust over five years.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
However, over seven years the picture is very different. The trust was hard hit during the 2008 correction and has only just moved ahead of the sector and index since then.
Performance of trust vs sector and index over 7yrs
Source: FE Analytics
“It’s a high-beta fund,” Tepes said. “If you think the market is going to continue going up you have a good chance of doing better than the market.”
“However, if you see a correction, I would expect it to sell off aggressively. 2008 was very tough for the trust, and if things turn you should be prepared to hurt a bit.”
Henderson Opportunities has ongoing charges of 1 per cent plus a performance fee.
