Pockets of value remain however; particularly in emerging markets and UK small caps, in spite of the latters’ stellar run since the financial crisis.
Here, we look at the only five investment trusts on double digit discounts that are run by an FE Alpha Manager, and ask closed-ended specialist Numis whether any present investors with an attractive buying opportunity.
Aberdeen New Dawn IT – 10.3%
FE Alpha Manager Hugh Young (pictured) is one of the most respected Asia Pacific investors in the world, running money well into the tens of billions.
Among he and his team’s best known closed-ended funds is the £616m Edinburgh Dragon trust, which sits in the IT Asia Pacific ex Japan sector. It has a sterling long-term record, returning more than 317.25 per cent over the last decade, compared to 228.66 per cent from its MSCI AC Asia ex Japan benchmark. A tough couple of years for emerging Asia and for Young in 2013 in particular has led to a widening discount for the trust. According to the AIC it is on a discount of 10.3 per cent – above its 8.8 per cent three year average, and significantly higher than its one-year low of just 1 per cent.
Ewan Lovett-Turner, an analyst at investment trust-broker Numis Securities, thinks that the calibre of Young combined with an above average discount makes New Dawn IT a good option.
“He certainly has a great long-term track record and is very clear in his approach,” he said.
Performance of trust and index over 10yrs
Source: FE Analytics
“There is a dynamic in this sector where discounts tend to trade between 5 and 10 per cent. They are quite range based, which is based mainly on big shareholders such as the City of London trust buying when they are good value and selling when they are on the more expensive side.”
“When they go into the double digits, they do start to look interesting.”
“Young is a manager we rate highly. He had a tricky time of it last year as was the case with a lot of trusts with a quality bias.”
Aberdeen’s Asia Pacific team look to buy quality franchises with strong cash flow and predictable earnings, at cheap to reasonable prices. Given Young’s own performance characteristics – he has typically been less volatile than his peers and outperformed during times of market stress – a similar approach to investing could be used when it comes to buying New Dawn.
The manager recently explained to FE Trustnet about why his funds have rebounded strongly this year after a poor 2013.
Throgmorton IT – 13.64% discount
Small caps have had a tremendous run over the past five years and since 2012 in particularly, but have suffered a sharp sell-off in recent weeks.
This has presented investors with a possible buying opportunity, says Lovett-Turner.
“Discounts in small cap trusts went to lows we hadn’t seen in some in March and April of this year,” he said.
“We saw Aberforth Smaller Companies IT come close to par and it’s now out to 9 per cent, and Throgmorton has also gone out quite a bit.”
FE Alpha Manager Richard Plackett’s Throgmorton IT is on a discount of 13.64 per cent according to the AIC – well above average for the IT UK Smaller Companies sector. This is also above the trust’s one year average of 11.14 per cent.
Plackett has run it with Mike Prentis since August 2008. Prentis is responsible for the day to day management of the fund, with Plackett mainly responsible for its contracts for difference (CFD) exposure, which makes up around 30 per cent of assets.
“He has a very good record, though he is currently on a six month sabbatical,” Lovett-Turner continued.
Performance of trust, sector and index since Aug 2008
Source: FE Analytics
“His portion of the trust has been left with [co-manager] Ralph Cox who has been on the team for as long as Plackett, and puts across a very clear message of how he the trust should be run.”
“Some may have concerns about a manager who takes a decision to go on a sabbatical, but the message is that it’s reinvigorated him and we have every confidence he will return, as was the case with [manager of the Scottish Mortgage IT] James Anderson.”
Plackett also runs the highly-rated BlackRock UK Special Sits fund.
Artemis Alpha IT – 11.69%
Lovett-Turner is less convinced by the remaining trusts as value opportunities, believing there are better alternatives in their relevant sectors.
While buying trusts on an above average discount can be very rewarding, he says that investors shouldn’t obsess over it.
“Overtrading can certainly be an issue from a cost point of view,” he said. “You need to be careful. The key is to find a good manager, and if the opportunity comes to buy them at a decent price, it’s a bonus.”
Artemis Alpha IT has also seen its discount widen of late, pushing it onto -11.69 per cent according to the AIC. This compares to a one year average of 9.49 per cent and three year average of 7.45 per cent.
While it sits in the IT UK All Companies sector, the £140m trust invests almost exclusively in small caps, mid-caps and unquoted companies. It has suffered falls of around 8 per cent since mid-January, putting it behind its peer group and the FTSE Small Cap index.
FE Alpha Manager John Dodd’s bias towards oil & gas stocks, which currently have a 15.3 per cent weighting in the trust, differentiates it from the competition. This has contributed to this trust’s underperformance versus its rivals in both IT UK All Companies and IT UK Smaller Companies in recent years, but those who believe the sector is due a turnaround may be interested in it.
Dodd, a co-founder of Artemis, built his reputation running the Artemis UK Smaller Companies fund between 1998 and 2010.
Fidelity Asian Values IT – 10.1% discount
As well as Young, Lovett-Turner rates Matthew Dobbs’ Schroder Asia Pacific IT and David Gait’s Pacific Assets IT in the Asia Pacific sector.
Another standout individual who was given FE Alpha Manager status in the latest rebalancing is John Lo, who runs the £157m Fidelity Asian Values IT.
Lo has outperformed his MSCI Far East ex Japan benchmark since he started running the trust in September 2001 with returns of almost 340 per cent, and is also ahead of the index over one, three, five and 10 years.
Performance of trust, sector and index since Sept 2001
Source: FE Analytics
This hasn’t stopped the trust moving to a double digit discount however.
Unlike Aberdeen’s Young, Lo had a very strong 2014, managing returns of 13.23 per cent compared to just 1.85 per cent from the index.
The manager believes valuations in Asia are very cheap, favouring exporters in Korea and Taiwan in particular. He thinks corporate earnings growth will perform better than expected this year, which should drive valuations higher.
While his return profile has been very different to Young’s of late, he also has an emphasis on quality, targeting companies with the ability to grow market share while maintaining pricing power.
All being well, these companies should emerge stronger after any downturn, making the trust potentially interesting for those who agree that Asia is over the worst of its three year slump.
SVM UK Emerging IT – 22.9%
With assets of just £3.5m, SVM UK Emerging IT is far too small for Numis and most other market makers to consider. Lovett-Turner says that when liquidity is this poor, it’s unlikely investors will be able to buy a trust for the 22.9 per cent discount anyway.
However, smaller investors who have followed Margaret Lawson on her top-performing SVM UK Growth fund may be interested by the trust, which is on the highest discount of any in the IT UK Smaller Companies sector.
Numis and its rivals had similar concerns over the late John McClure’s now £87m Acorn Income IT three or four years ago; however, a narrowing discount has helped it return more than 180 per cent since the beginning of 2012. Like the £105m SVM fund, SVM UK Emerging IT concentrates on the lower end of the market spectrum. It invests predominantly in FTSE 250, FTSE Small Cap and FTSE AIM companies, though has some exposure to large caps. Sports Direct, ASOS, Ted Baker and Thomas Cook are all top-10 holdings.
The sell-off in small caps has hit the trust hard, though the trust is still beating its FTSE AIM benchmark since she joined the team in September 2012.
