Making a saving on a major Black Friday purchase is frequently cited as a false economy, with shoppers often enticed into buying something they wouldn’t even have considered had it not been on a discount.
However, one area where it is possible to make genuine savings is on investment trusts, which often fall on to major discounts due to a shift in sentiment rather than a change in the underlying fundamentals.
Here Willis Owen’s head of personal investing Adrian Lowcock names three trusts that are currently available at bargain prices.
F&C UK Real Estate Investments
Lowcock said property has been one of the areas hardest hit following “Westminster’s damning response” to Theresa May’s agreement on how to leave the EU, with the sector at risk if the UK ends up with a hard and uncertain Brexit.
“If the UK enters recession or if some companies choose to relocate, that could result in empty properties with no rental income,” he explained. “In that situation, owners such as F&C UK Real Estate Investments may have to drop rents and revalue their properties accordingly.”
The most sensitive area for property investing this year has been the high street and a hard Brexit is unlikely to be good news for retailers as consumers would probably adopt a “wait and see” approach before making big purchases.
This trust has 17 per cent of its assets in retail, rising to 38 per cent including out-of-town retailers. This helps to explain why the discount to net asset value (NAV) has widened to 18.55 per cent, the largest figure of the year and much higher than its three-year average of just 1.01 per cent.
However, Lowcock believes this is pricing in an overly pessimistic worst-case scenario.
“Unlike unit trusts, this closed-ended fund is unlikely to be forced into selling any properties,” he said. “So patient investors can stick out the short-term volatility while new investors willing to take a risk could access the trust at a large discount and attractive yield of 5.34 per cent.”
Performance of trust vs sector over 10yrs
Source: FE Analytics
Data from FE Analytics shows F&C UK Real Estate Investments has made 126.9 per cent over the past decade, compared with 66.54 per cent from its IT Property Direct sector.
It has an ongoing charges figure (OCF) of 1.2 per cent, a yield of 5.7 per cent and is 37 per cent geared.
Tritax Big Box REIT
This trust invests in the big warehouses needed by online companies to fulfil their orders. Lowcock said this sort of asset also benefits from long leases and lease renewal as the companies renting warehouses need consistent, cost-effective and reliable locations to meet their needs.
“As tenants prefer to avoid the hassle of relocating, this plays into Tritax’s hands when rent negotiation time comes around,” he added. “Upwards-only rent reviews are a regular feature of these agreements, which is why investors looking to diversify their income will continue to find this sort of investment attractive.”
Lowcock said the trust has traded at a premium for several years as investors have sought the steady, inflation-linked income the asset class has to offer, but the recent sell-off has led to a rare situation where it now trades at a discount of 3.34 per cent to the NAV. This compares with an average premium of 7.71 per cent over the past three years.
“The trust offers a yield of 4.7 per cent, which is well covered,” he added. “It has good-quality tenants and repeatable earnings.”
Performance of trust vs sector since launch
Source: FE Analytics
Tritax Big Box REIT has made a 67.91 per cent return since launch in December 2013, compared with 43.15 per cent from its IT Property Specialist sector. It has ongoing charges of 0.85 per cent and is 8 per cent geared.
Woodford Patient Capital Trust
Enormous hype surrounded the launch of this trust due to the combination of FE Alpha Manager Neil Woodford’s stellar track record and the exciting potential for growth available from private equity investing.
While the initial reaction to the trust was positive and it jumped to a large premium, investors quickly lost patience as it faced a series of disappointing results from its underlying holdings. The trust is now one of the most unloved in its sector and trades on a discount of around 15.6 per cent.
Lowcock said this is a reflection of the past performance and it is important to remember that investing in unlisted equities is risky with bad news “nearly always coming at the start of the journey”.
“However, the fate of the trust is turning as those patient investments are starting to deliver some positive news,” he added.
“This includes the listing of Autolus Therapeutics and an investment in Oxford Nanopore by Amgen, a large US biotechnology company. That said, many investors are still sceptical and as a result the discount to the NAV has widened.”
Lowcock added that if Woodford’s approach eventually pays off, there is a fair bit of upside potential for this trust and, should performance continue to improve, the discount is likely to reduce.
“However, the DNA of this trust makes it suitable only for long-term investors who are willing to take the considerable risk of investing in early-stage businesses,” he finished.
Performance of trust vs sector since launch
Source: FE Analytics
Data from FE Analytics shows Woodford Patient Capital is down 13.25 per cent since launch compared with gains of 21.54 per cent from its IT UK All Companies sector. It has ongoing charges of 0.19 per cent and is 16 per cent geared.