It’s been a very topsy-turvy start to the year for financial markets, with sheer panic surrounding China’s future and concerns of a US recession making way for a relief rally in some of 2015’s worst hit areas like mining and energy stocks.
FE data shows, for example, that though the FTSE All Share has rallied some 13 per cent in the middle of February the index is still down 0.41 per cent year-to-date.
While sentiment certainly seems to have improved, a number of UK-focused investment trusts have seen their shares fall out of favour, meaning their discounts have widened relative to underlying net asset values (NAVs).
Interestingly, a number of well-known closed-ended funds headed by star managers have been caught out by this trend. In this article, we take a closer look at five of them.
Mark Barnett’s Edinburgh Investment Trust – 4.61% discount
First up is a trust that many view as a core holding within the UK – Edinburgh Investment Trust. 
The trust, which has been run by FE Alpha Manager Mark Barnett (pictured) since January 2014 following Neil Woodford’s departure from Invesco Perpetual, has seen its discount widen to 4.61 per cent over recent weeks with the shares having – on average – traded on a 0.42 per cent discount over the past three years.
This means the shares are now close to the widest discount they have traded on over the past year.
Edinburgh Investment Trust’s discount/premium over 5yrs
Source: FE Analytics
FE data shows the underlying NAV has only fallen 2.71 per cent so far in 2016, but the widening discount has meant investors in the trust have lost 7.29 per cent over that time.
Lovett-Turner, director of investment companies research at Numis, says Edinburgh’s widened discount is a result of a general market trend rather than anything to do with Barnett’s portfolio. Given the trust yields 3.65 per cent and as Barnett is one of the top-rated UK managers, Lovett-Turner says now is an attractive entry point into Edinburgh as it remains a core UK holding.
Despite a painful few months, the trust has performed well under Barnett with its shares up 23.58 per cent compared to a 4.13 per cent and 2.51 per cent respective gains from the FTSE All Share and the IT UK Equity Income sector.
The trust, which is geared at 13 per cent and has ongoing charges of 0.61 per cent, counts the likes of British American Tobacco, BT Group and AstraZeneca as a top 10 holdings.
Alastair Mundy’s Templar Bar – 8.77% discount
Unlike Edinburgh, shares in Alastair Mundy’s Temple Bar Investment Trust have been out of favour for some time thanks to the manager’s highly value/contrarian approach to the market.
For example, the trust lost some 7.89 per cent in total return terms last year as Mundy was exposed to cheap areas of the market which remained cheap due to macroeconomic headwinds – such as banks and oil stocks.
As such, data from the AIC shows the trust has traded on an average discount of 4.82 per cent over the past 12 months. Nevertheless, even though Mundy’s underlying portfolio has performed roughly in line with the wider market so far this year, the shares have moved out to a substantial 8.77 per cent discount to NAV.
Of course, many investors feel uncomfortable backing a fund or trust which has been a through a tough run of performance but many industry experts believe the value investing style is due a turnaround having underperformed growth and quality for number of years now.
Certainly, Mundy has put his contrarian approach to work well over the longer term. FE data shows Temple Bar has returned 277.11 per cent since Mundy took charge in October 2002, beating the FTSE All Share by close to 80 percentage points in the process.
The trust currently yields 3.96 per cent, is geared at 4 per cent and has ongoing charges of 0.49 per cent. Top 10 holdings include HSBC, GlaxoSmithKline, BP, Lloyds and RBS.
James Henderson’s Lowland Investment Company – 3.01% discount
One of the biggest headwinds managers have had to deal with this year is a significant shift between last year’s best and worst performing areas of the market.
For example, while the FTSE 100 posted losses in 2015, UK mid and small-caps delivered double-digit returns thanks to an improving UK economy and a business friendly government. However, it has been bombed out mega-caps that have led the recent snap rally while smaller companies have struggled to recuperate their losses.
This has had a profound effect on some of the last year’s best performing trusts, such as FE Alpha Manager James Henderson’s Lowland Investment Company.
The trust is usually split a third, a third and a third across small, mid and large-caps – meaning it is structurally overweight the lower end of the UK market-cap spectrum relative to the FTSE All Share (which is 80 per cent biased towards FTSE 100 companies).
Though the trust has performed relatively okay from an NAV perspective, its shares have drifted out to a 3 per cent discount having previously traded on a 4 per cent premium at times over the past 12 months.
Lovett-Turner still rates Lowland – which has nearly doubled its benchmark and average peer over 10 years – highly thanks to Henderson’s abilities and the fact it acts as a good diversifier within a market that can often be very concentrated, adding the shares now look “reasonably attractive”.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
It is, however, relatively highly geared at 17 per cent and has a dividend yield which is low compared to the wider market at 3.4 per cent. Lowland Investment Company has ongoing charges, excluding a performance fee, of 0.62 per cent.
Alex Wright’s Fidelity Special Values – 8.84% discount
This is another trust with a high weighting to the lower end of the FTSE All Share and, like Alastair Mundy, the manager has a clear value/contrarian style.
FE Alpha Manager Alex Wright, who also heads up Fidelity UK Smaller Companies fund and the group’s flagship Special Situations fund, has managed Fidelity Special Values since September 2012.
Despite the fact the value investing has largely struggled, Wright’s trust had a barnstorming 2015 with returns of 18.62 per cent thanks to its bias towards mid and small-caps. A narrowing discount – which even reached a 2.33 per cent premium – also boosted returns.
Fast forward to today, though, and its discount of 8.84 per cent is considerably wider than its average over the past three years.
Given the next few months are likely to remain volatile for UK equities with the referendum over the UK’s future relationship with the EU looming, investors may wish to hold off buying into a contrarian trust – especially one that offers little yield given it sits in the IT UK All Companies sector.
Nevertheless, Wright has a good track record on the trust with Fidelity Special Values more than tripling the FTSE All Share and nearly doubling the sector average since he has been at the helm with returns of 89.74 per cent.
Currently, the trust counts Royal Dutch Shell, Lloyds and Royal Mail as top 10 holdings but has some 45 per cent in mid and small-caps. Its gearing is 21 per cent and has ongoing charges of 1.13 per cent.
Philip Rodrigs’ River & Mercantile UK Micro Cap – 2.24% discount
Newly launched trusts often jump to a premium to NAV, especially when they are headed up by well-regarded managers.
That was certainly the case with FE Alpha Manager Philip Rodrigs’ River & Mercantile UK Micro Cap Investment Trust following its IPO in December 2014.
The closed-ended fund received a lot of attention as not only has Rodrigs proved his stock-picking abilities during his time at Investec, but as a result of its innovative structure. For example, given capacity is key within the micro-cap space, the board will instigate compulsory redemption of shareholdings if the NAV were to grow between £110m to £125m to manage liquidity.
However, new trusts hardly trade on premium for too long and – thanks to the recent market volatility – shares in River & Mercantile UK Micro Cap, which isn’t geared, now trade on 2.24 per cent discount to NAV.
The trust has returned 13.3 per cent since its launch, meaning it has underperformed relative to the IT UK Smaller Companies sector, but Hawksmoor’s Ben Conway – who bought the trust at IPO – says now is an interesting time to look at it again.
Performance of trust versus sector since launch
Source: FE Analytics
“We are happy with our holding in the trust and that discount has only really opened up in the last two weeks. This is usually the type of occasion we would be looking to add to our exposure, but at the moment, we have other things going on in our fund. If we were seeing inflows, though, we would be looking to buy,” Conway said.
He warns, however, that given the amount of issuance last year in the closed-ended fund space as many more specialised areas of the market have been hit hard recently, he says investors may have to expect a poor period from trusts like the River & Mercantile offering.
However, he added: “Put it this way, if that discount moved to 5 per cent, we would find cash to invest.”
