A number of equity income investment trusts are trading at unusually low discounts despite having strong managers at their helm and good long-term track records, according to Hargreaves Lansdown’s Mark Dampier (pictured). 
The research director says investors should take advantage of current bearish sentiment and, in what he has described as “the most hated rally ever”, should turn to investment trusts to reduce valuation risk.
“I love equity income. I got accused on Twitter the other day of saying the answer to everything is equity income, but the answer to most things is funnily enough equity income for most people,” he said.
“I don’t understand why equity income trusts are so lowly rated. They’ve actually been de-rated and have gone to 10 per cent discounts in many cases at a time when interest rates are giving you diddly squat while they’re giving you around 4 per cent.
“It’s quite extraordinary – it tells you the level of bearishness around. It’s not that I see outstanding value or anything and I quite understand the bear case. It’s not easy and I don’t want to sound complacent because I’m not. It’s just that normally, you get a bull market and you get a couple of siren voices in that but now everybody is cautious.”
As such, he believes the correction many investors are fearing would be short-lived, given the amount of cash being held on most balance sheets at the moment.
“I just say stay invested and make sure you have some cash for your everyday needs. It’s quite simply really,” he said. “The reality is investment is simple and everyone makes it hugely complicated.”
In the below article, Dampier lists three trusts run by managers he particularly likes which are also trading on historically wide discounts.
Law Debenture Corporation – 11.23 per cent discount
FE Alpha Manager James Henderson’s £824m trust is currently trading on an 11.23 per cent discount, which is more than twice as wide as its three-year average discount of 5.51 per cent.
The manager aims to achieve both capital growth and a steadily increasing income, which he does through a portfolio of predominantly UK stocks. Despite being benchmarked against the FTSE All Share index, the trust resides in the IT Global sector and is therefore able to invest across other regions.
For instance, he currently holds around 70 per cent of his portfolio in UK stocks, 12.3 per cent in North American stocks, 8.2 per cent in Europe and 7.6 per cent in Asia Pacific including Japan. His largest individual holdings include Royal Dutch Shell, HSBC and BP, with his list of top 10 stocks accounting for a combined 20.5 per cent of the overall portfolio.
It is perhaps no surprise that the trust is trading on a discount, given its large weightings in industrials and financials. While this has meant it has outperformed its benchmark over one and three months, it has perhaps weighed on returns over the last one, three and five years which has led to bottom-quartile performances over each of these time frames.
That said, the trust has rewarded investors who have held it over longer term time frames, having returned 111.33 per cent over the last decade compared to its benchmark’s return of 64.21 per cent.
Since Henderson took to the trust’s helm in 2003, it has outperformed its sector average and benchmark by 22.13 and 125.2 percentage points respectively with a total return of 325.06 per cent.
Performance of trust vs sector and benchmark since launch
Source: FE Analytics
Over the same time frame, if an investor had put an initial £10,000 in the trust they would have received £8,509.14 in income.
That said, it has a maximum drawdown (the most money lost if bought and sold at the worst times) of 46.36 per cent over Henderson’s tenure compared to its average peer’s drawdown of 39.98 per cent, suggesting it may not be suited to the more cautious investor.
Law Debenture Corporation is 8 per cent geared, yields 3.2 per cent and has an ongoing charge of 0.45 per cent.
Perpetual Income & Growth – 5.66 per cent discount
Next up is FE Alpha Manager Mark Barnett’s £1.1bn Perpetual Income & Growth trust, which he has managed since 1999.
The trust aims to provide investors with real dividend growth as well as capital growth, which it does through UK stocks across the cap spectrum. At the moment, it has a 47.9 per cent weighting in FTSE 100 stocks, 22.2 per cent in FTSE 250 companies, 11.4 per cent in international equities and 10.4 per cent in FTSE Small Cap firms.
However, its largest holdings are often dividend-paying large and mega-caps; these currently include the likes of Reynolds American, British American Tobacco and AstraZeneca.
Since Barnett has been at the helm of the trust, it has comfortably doubled the performance of its sector average and benchmark with a total return of 437.21 per cent. It has done so with a top-quartile maximum drawdown, downside risk (which indicates a fund’s susceptibility to lose money during falling markets) and annualised volatility.
Performance of trust vs sector and benchmark under Barnett
Source: FE Analytics
It has also outperformed its average peer during eight out of the last 10 years, only falling into the bottom quartile for its returns in 2008 and year-to-date. In 2016 so far, it is down 8.46 per cent compared to its benchmark’s return of 11.16 per cent.
This could be because of its large weightings in financials and healthcare stocks, which have struggled recently. As such, the trust is trading on a discount of 5.66 per cent compared to its three-year average discount of 1.72 per cent.
If an investor had put £10,000 into the fund 10 years ago, however, they would have received £4,371.6 in income.
Perpetual Income & Growth is 17 per cent geared, yields 3.5 per cent and has ongoing charges including a performance fee of 1.06 per cent.
Standard Life Equity Income – 5.77 per cent discount
The final trust on Dampier’s list is Standard Life Equity Income, which has been headed up by FE Alpha Manager Thomas Moore since 2011.
As with Perpetual Income & Growth, the £226m trust is able to invest across the cap spectrum although it only holds 5.5 per cent in small-caps at the moment. While a further 13.1 per cent of the trust is in non-index stocks, 43.2 per cent is in FTSE 100 companies and the remaining 38.2 per cent is in UK mid-caps.
Moore is well-known for adopting more of a value-based approach to investing and, as such, Dampier says the trust could sit well alongside Barnett’s aforementioned trust. Its largest holdings currently include Sage, BT, Vodafone and Aviva.
Over Moore’s tenure, the trust has returned 84.67 per cent compared to its sector average’s return of 73.3 per cent and its benchmark’s return of 56.51 per cent.
Performance of trust vs sector and benchmark under Moore
Source: FE Analytics
While the trust has outperformed its average peer during 2012, 2013 and 2014, it is in the bottom quartile year-to-date, having lost 11.09 per cent. Again, this could be a result of the trust’s large weighting in financials, which currently stands at 40.3 per cent.
As such, it is trading on a 5.77 per cent discount, which is twice as wide as its one-year average discount and almost four times as wide as its three-year average discount.
If an investor had put £10,000 into the trust when Moore first started running it, they would have received £2,775.28 in income.
Standard Life Equity Income is 9 per cent geared, yields 3.8 per cent and has an ongoing charge of 0.94 per cent.