However, the mini-correction has had a big impact on some funds, especially those in the investment trust universe. Many have been hit with the double-whammy of falling share prices and narrowing discounts, which may be of interest to bargain hunters looking for an entry point.
“Discounts are still tight generally, but there have been some moves in certain areas,” said Charles Cade, head of investment trust research at Numis, who highlights small and mid-cap focused UK trusts as a standout area.
Cade warns investors against indiscriminately buying trusts that look cheap compared to their history, but if you’re attracted by a certain sector in the long-term, he thinks now could be a good time to strike.
“It all depends on your outlook. If you think there will be a pick-up in corporate action and M&A activity, and the UK economy will continue to recovery, some are looking more attractive now than they were previously.”
Here are five trusts that are at the cheaper end compared to what they’ve been so far in 2014:
Dunedin Smaller Companies IT – 16.2% discount
Ed Beal’s £96m trust is at the cheapest it’s been since 2012, trading on a discount of 16.2 per cent.
As recently as February it was trading on a premium, but the poor performance of UK small caps and the relative underperformance of the trust itself has seen a steep decline.
Discount/premium over 5yrs
Source: FE Analytics
Cantor’s Charles Tan says Beal’s style has been out of favour in recent months, contributing to NAV losses of 8.26 per cent in 2014, and 16.09 per cent in share price terms.
A hefty weighting to industrials has weighed particularly heavily on performance, including a top-10 position in Fenner, which is down around 34 per cent over the period.
Performance of trust, sector and index in 2014
Source: FE Analytics
Cade thinks that the current discount makes the trust attractive even compared to others in the sector that have suffered a recent set-back.
“[Ed Beal] is an experienced manager. He has been distinguished for generating a higher yield than his peers, but has suffered in the recent poor patch for the sector,” he said.
“It’s often the case that when experienced managers go onto a discount at level that it should be in your favour to buy.”
Cade points out that Dunedin Smaller Companies IT doesn’t have a strong institutional base, meaning that it is more susceptible than most to going onto premiums and large discounts.
A re-rating in small caps could see it go back onto a premium again as a result, he says.
The trust has ongoing charges of 0.82 per cent, but does have a performance fee attached.
Over the long-term Beal has consistently added alpha, beating his IT UK Smaller Companies sector and FTSE Small Cap ex IT benchmark in six of the last nine calendar years since Beal took over.
In two of the years it did underperform, it still made over 30 per cent.
Keystone IT – 5% discount
While small and mid-caps have been hit hardest recently, one trust that has seen its discount go out recently is star manager Mark Barnett’s Keystone IT.
FE data shows that the trust was on a premium for much of last year, but has fallen onto a discount in 2014. The recent turbulence in markets has seen its discount drop to one of its lowest levels since 2012.
Cade says that Barnett is one of the best UK income managers in the business, noting that Keystone IT is run in much the same way as the higher profile Perpetual Income & Growth IT.
On its current valuation, he says it’s well worth a look for those who want exposure to the FE Alpha Manager.
“I’ve always felt that Perpetual Income & Growth IT and Keystone IT should be merged, but it certainly looks cheap on this basis,” he said.
“It’s not the most actively traded trust in the world, but when a manager like this is on a wider discount than he has been, it’s always interesting.”
Like Perpetual Income & Growth and Barnett’s Invesco Perpetual UK Strategic Income funds, Keystone has outperformed its peers and the FTSE All Share index with less volatility over the longer term.
Performance of trust, sector and index since Jan 2003
Source: FE Analytics
He took over the trust, which is yielding just under 3 per cent, in early 2003. It has ongoing charges of 0.96 per cent, but also charges a performance fee.
Schroder UK Growth – 7.1% discount
As well as a sell-off in the UK market, the Schroder UK Growth IT has had to deal with the high profile departure of Julie Dean, who left the team only 14 months after taking over from Richard Buxton.
News of Dean’s appointment saw the trust jump from an 8 per cent discount to a premium, but her mid-cap overweight and consequent underperformance saw it fall back to a 5 per cent discount this summer. Her exit has seen this fall back further to 7 per cent.
Performance of trust and index over 1yr
Source: FE Analytics
Both Cade and Cantor’s Tan thinks the 7 per cent discount is attractive even though the board is still yet to find a replacement for Dean.
Her business cycle team is temporarily running the trust in her absence.“My personal instinct tells me to pick up the bargain and wait for a manager to steady the ship,” said Tan.
“The discount is significantly wider than the [IT UK All Companies] sector average. The loss of Dean is a blow but if you look at the Schroders stable they have a strong and credible team. Personally I think it’s attractive.”
Cade added: “It’s hard to recommend a trust when money is flowing out of the open-ended equivalent, but the board has said it will protect a 5 per cent discount, and it’s above that.”
“Whatever happens and whoever takes over, there is not a lot of downside.”
Cade is less sure than Tan that the board will elect a manager from within the Schroders brand, believing previous manager Buxton could take over.
Schroder UK Growth IT has ongoing charges of 0.47 per cent and doesn’t charge a performance fee.
BlackRock Throgmorton IT – 14% discount
The trust has been hit by not only the small cap sell-off but also news that FE Alpha Manager Richard Plackett is taking more of a backseat role on BlackRock’s small cap team.The trust has been on a double digit discount since the summer, falling to 14 per cent in the past few weeks – the lowest level it’s been sincemid-2013.
Cade points out Mike Prentis and Plackett’s replacement Ralph Cox are very good managers in their own right, adding that Plackett is still very much of the team.
In spite of the recent soft-patch, BlackRock Throgmorton IT has been one of the best-performing IT UK Smaller Companies trust since Prentis took it over in July 2008, with returns of almost 150 per cent. This compares to 105.16 per cent from the sector average.
Performance of trust, sector and index since July 2008
Source: FE Analytics
As well as a widening discount, Throgmorton’s NAV performance has also taken a hit recently, though Tan thinks it is likely a short-term blip.
He commented: “Poor performance in April has coincided with Plackett’s absence. Ralph Cox explained that the underlying shorting strategy has suffered a style drift recently.”
“The trust has been typically long small caps and short the FTSE 100, which has been something of a double whammy with large caps outperforming considerably.”
BlackRock Throgmorton IT has ongoing charges of 1.11 per cent, but has a performance fee on top of that.
