The ‘good, bad and ugly’ investment trust opportunities amidst heightened volatility

The year was off to a volatile start when markets began pricing in rising inflation, the withdrawal of stimulus, the prospect of rising interest rates and a rotation from growth into value.

On top of this, however, investors are now faced with the prospect of war in Eastern Europe as Russian troops invade Ukraine – which has further heightened the volatility and widening of discounts in the investment trust space.

Source: Peel Hunt

Peel Hunt analysts Anthony Leatham and Markuz Jaffe said this had thrown out “interesting anomalies” that could make for intriguing tactical investment opportunities.

The analysts highlighted some investment trusts within the life sciences space, namely the Worldwide Healthcare trust, which is on a 9% discount to net-asset-value (NAV). Over the past five years, the trust has typically traded just under a 1% premium to its NAV.

The analysts said the trust’s performance has suffered due to its overweight positions in poorly performing emerging biotechnology stocks, China, and US biopharmaceutical companies Vor Biopharma and Haemonetics.

Life science specialist investment trust Syncona (SYNC) was another that the analysts believe has potential upside. It is trading on a 10% discount to its NAV, yet the performance of the underlying portfolio has held up well.

Indeed, the NAV total return over the past six months is 11%, versus the MSCI World Healthcare index down -14%.

“One of the main drivers has been the portfolio’s third successful exit (the sale of Gyroscope for up to $1.5bn),” the analysts said.

“Looking ahead, there is plenty to get animated about, with important milestones for Autolus, Achilles, Freeline and Anaveon. It was not that long ago that the market was happy to see SYNC trading on a double-digit premium to NAV.”

Performance of WWH and SYNC over 1yr

Source: FE Analytics

The analysts also noted Polar Capital Technology trust’s 11% discount. Despite flagging his concerns about inflation, late-cycle exuberance and testing valuations, manager Ben Rogoff was unable to avoid the recent sell-off in technology stocks but shares may have gone too far the other way.

Similarly, Impax Environmental Markets (IEM) has fallen almost 30% over the past three months, despite its NAV being down just 17%.

“This time last year, the trust was on a premium of 10%, but this has given way to an 8% discount to NAV today,” the analysts noted.

“Whilst the environment credentials are still intact, the style profile of this portfolio is firmly in mid-cap growth, which, over the short term, has taken the gloss off this go-to [environmental, social and governance] ESG solution.”

Elsewhere, the analysts highlighted the Hipgnosis Songs Fund (SONG) which dropped 12.8% year-to-date. It is trading at a roughly 15% discount to its NAV.

Performance of SONG year-to-date

Source: FE Analytics

“We suspect there are a number of factors at play, notably uncertainty or doubt caused by the Neil Young/Spotify exchange,” they said, in which the musician removed his music from the streaming site.

There could also be cross-sector issues from Universal Music Group (UMG), which is down 20% year-to-date and 22% since listing in September 2021, the analysts said.

“There has also been general rating pressure that many income strategies have come under, against a higher inflation/interest rate backdrop and heightening market volatility,” they added.

Another reason for its discount could be due to the drainage of its natural buying demand after the investment company raised £156m in the summer of 2021, the analysts said.

Despite this, they were bullish on the investment company due to the elevated activity in the music royalty space, further discount rate compression and potential improvement in its revenues.

Turning to other current events, in recent weeks the price of oil and gold have risen amidst the war in Ukraine and fears of potential escalation between Russia and the rest of Europe.

Against this backdrop, the analysts highlighted a few trusts that could be beneficiaries, namely BlackRock World Mining (BRWM) and BlackRock Energy and Resources Income (BERI) – which both have exposure to precious metals and energy.

“A more focussed play on precious metals equities can be found in Golden Prospect Precious Metals (GPM), a much smaller trust (£37m) trading on a wider-than-average 16% discount,” the analysts added.

For a more pure-energy play, the analysts pointed to Riverstone Energy, which has more than 80% of its portfolio exposed to oil and gas stocks mostly across North America.

For more cautious investors, the analysts pointed to three trusts that could provide investors a strategy focused on capital preservation and total return opportunities: Ruffer Investment Company, Personal Assets Trust and Capital Gearing Trust.

Performance of three trusts year-to-date

Source: FE Analytics

The analysts noted the Ruffer trust’s blend of equities (39%), defensive assets such as index-linked bonds (30%), gold, gold equities (7%), cash (15%) and various strategic options (7%) as a comfort to nervous investors.

Trojan’s Personal Assets Trust has a similar blend of equities (38%), US TIPS (29%), UK T-Bills (18%) and gold-related investments (11%) while Capital Gearing Trust blends equities (17%), to index-linked and conventional government bonds (36% and 9% respectively), but it differs from the previous two through its positions in alternatives such as property (18%), infrastructure (7%), and loans (4%).

The analysts said: “All three strategies have been well positioned for the inflationary and rising interest rate backdrop, and the heightened market volatility plays well to the defensive nature of each strategy.”