Growth stocks, particularly technology ones, have seen significant falls in recent weeks as the market has turned towards more defensive sectors.
Tech funds in particular look very cheap, but Scouller cautions against buying in at this point.
“Whilst these discounts have widened, we would still be somewhat wary as sectors that see a sharp de-rating after a period of strong performance tend to stay out of favour for some time,” he said.
Technology stocks have sold off in recent weeks, leaving a lot of specialist funds nursing significant losses. Discount movements in closed-ended funds have compounded these falls.
Polar Capital Technology has slipped onto a 7 per cent discount, its widest over a six month period in which it has been on a 3 per cent premium.
The trust has lost 12.13 per cent year-to-date in share price terms, as the FTSE All Share technology index has fallen 7.86 per cent.
Performance of funds vs index in 2014
Source: FE Analytics
Herald is on an 18 per cent discount, the widest it has been over six months in which it has been on a 3 per cent premium.
RCM Technology is on a 10 per cent discount compared to a six-month average of between 3 per cent and 12 per cent.
The sell-off in tech stocks has been the most extreme example of a growing aversion to risk which has seen smaller companies fund also hit.
The FTSE Small Cap Index is down 5.53 per cent since 24 February while the FTSE 250 is down 5.34 per cent and FTSE 100 just 4.15 per cent.
Performance of indices since 24 Feb
Source: FE Analytics
BlackRock Smaller Companies, Standard Life Smaller Companies and Montanaro European Smaller Companies all seem cheap by recent standards, as a result, Scouller says.
BlackRock Smaller Companies is on an 11 per cent discount having been on a 1 per cent premium during the past six months. The widest the discount has been is 12 per cent.
Standard Life UK Smaller Companies is on a 3 per cent discount, having regularly traded on a premium for a long time – as high as 5 per cent during the past six months.
Price and NAV of trust over 6 months
Source: FE Analytics
FE Alpha Manager Harry Nimmo’s trust has been hit particularly hard by the recent stock market falls thanks to its high weighting to internet stocks such as ASOS and Rightmove which have fallen most severely.
Nimmo runs an open-ended fund with essentially the same constituents. The trust tends to make more money than the open-ended fund in rising markets but this volatility has also hurt it on the way down, FE data shows, with the trust’s share price falling further in the recent sell-off.
Performance of fund vs trust over 1yr
Source: FE Analytics
Ewan Lovett-Turner, analyst at Numis Securities, says that this looks like an attractive entry point into the trust, although investors need to be aware of the manager’s style if they are considering it.
“You are getting access to a manager with a good long term track record at a bit of a discount,” he said.
“It is one of the more growth orientated of the smaller company investment trusts out there, so it depends on your outlook and whether you want that growth profile in your portfolio or if you want more of a value fund like Aberforth or Henderson which is on a 14 per cent discount and sits between the two in terms of style”
He adds that the fund is also not the cheapest out there, and those looking for bargains may find better opportunities.
“You might look at the smaller companies sector as a whole,” he said. “You have a lot of trusts trading on double digit discounts.”
In fact, the sector average is 11.2 per cent, and only Aberforth Geared Income and Athelney are more expensive, both on substantial premiums.
Lovett-Turner adds that the sector has had a very strong run over the past year, and the recent sell-off could be seen as a reversion to more normal valuations, therefore the recent widening of discounts doesn’t represent the opening up great value.
Europe funds, in contrast, look expensive compared to their recent history.
“European trusts have seen some significant discount narrowing in recent weeks, although we think this may reflect the fact that NAVs have fallen faster than the share prices, with the result being narrower discounts,” Scouller said.
He highlights JP Morgan European Smaller Companies which has seen NAV fall 7 per cent over the past month while the share price has actually risen 3 per cent.
The result is the trust is trading on a 5 per cent discount, near the top of its six month range of 14 per cent to 4 per cent.
Montanaro European Smaller Companies also looks expansive on a 4 per cent discount, as narrow as it has been over six months during which it has been as wide as 12 per cent.
Henderson European Focus has slipped onto a 3 per cent premium having traded as low as a 4 per cent discount over the period.
A more stock-specific story is the JPMorgan Mid Cap fund, which is at the top of its six month range of 13 per cent to 4 per cent discounts.
“There are significant profits to take following the 39 per cent rise in the share price and 26 per cent increase in the NAV TR over the past year,” said Scouller.
