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The investment trusts trading on a premium that are still worth buying

19 July 2023

Experts name the investment trusts worth backing despite being expensive.

By Jean-Baptiste Andrieux,

Reporter, Trustnet

Despite the majority of investment trusts looking cheap, some expensive options are still worth buying, according to experts.

Data from Numis Securities shows only 22 close-ended funds are trading on a premium or 6.5% of the Association of Investment Companies (AIC)’s universe. This is less than half the number a year ago (45) and a fifth of those at the end of 2021 (105).

Investors typically look for bargains, buying cheap trusts that can benefit from not only a rise in the underlying assets, but also a bump from the share price discount narrowing.

The opposite is also true – buying shares in an investment company trading on a premium means gaining exposure to assets at a higher price than the cost of buying the shares yourself (excluding trading fees).

While buying shares in an investment trust trading on a premium may not sound like a good deal, it can be a sign of quality, which suggests that the excess cost might be a price worth paying.

The City of London Investment Trust and JPMorgan Global Growth & Income are two investment trusts that fit the bill, as they have been on premiums over the past five years.

Both trusts, which are also the largest by market capitalisation on the list (£2bn for the former and £1.8bn for the latter), have commanded an average premium of 1.8% over half a decade.

City of London currently trades on a 5.2% premium according to FE Analytics and Ryan Lightfood-Aminoff, investment trust research analyst at Kepler, said it deserves this premium rating, highlighting the combination of experience and dependability.

Job Curtis has managed the trust for nearly 32 years and aims to deliver long-term growth in income and capital through businesses listed on the UK stock market.

Lightfood-Aminoff added: “Even longer than Job’s experience is the trust’s track record in increasing the annual dividend, which currently stands at 57 years. For context, the last time the dividend wasn’t increased is closer to the First World War than today.

“In these inflationary times, a reliable income has arguably become of increased importance and therefore we believe City of London is fully deserving of its modest premium.“

Total return of trust vs sector and benchmark over 10yrs

Source: FE Analytics

The trust sits in the second quartile in the IT UK Equity Income sector over 10 years and is part of the AIC’s dividend heroes.

JPMorgan Global Growth & Income shares similar objectives but invests globally. It is currently trading on a 1.3% premium.

Emma Bird, head of investment trust research at Winterflood liked the trust’s consistency of performance and considered it as a core exposure to global equities.

The trust has outperformed the MSCI AC World index over several periods, including 10 years, five years and one year.

Bird said: “This degree of consistency is commendable, in our view, particularly over a period that saw a range of market and macroeconomic conditions.

“We believe that the disciplined application of the managers’ style-agnostic, research-driven investment approach has been a key driver of the consistency of performance and we would expect this to continue.”

Total return of trust vs sector and benchmark over 10yrs

Source: FE Analytics

Timothy Woodhouse has managed the trust since 2017, taking over from Jeroen Huysinga after he left the firm. Woodhouse was joined by Rajesh Tanna in 2017 and FE fundinfo Alpha Manager Helge Skibeli in 2019.

Last year, the trust took on more assets under management through the merger with the Scottish Investment Company in 2022.

Bird said she was confident about the trust’s ability to keep delivering for its investors going forward.

“In our opinion, the enhanced dividend policy, which targets an annual payment of at least 4% of the previous year-end net asset value (NAV), makes good use of the investment trust structure. The board has recently announced that it intends to pay dividends totalling 18.44p per share in relation to its financial year to 30 June 2024, giving a prospective yield of 4%,” she said.

“This represents an increase of 8.5% on the previous financial year's total dividend of 17p per share, and the eighth consecutive year that the dividend has been raised.”

In a more specialist area, Ashoka India Equity Investment Trust was also highlighted by experts. The trust was launched in 2018 and has traded on an average premium of 0.2% since then.

It invests in Indian equities, tapping into the country’s economic growth and the expansion of the middle classes.

Considering its relatively young age and its specialist nature, the trust is much smaller in terms of market cap (£234.2m) and is currently trading on a 1.6% premium.

Total return of trust vs sector and benchmark since launch

Source: FE Analytics

Lightfood-Aminoff said: “Premium valuations are often seen in unique but well performing asset classes. This is where Ashoka India Equity comes in. Despite being the newest entrant to the AIC India/Indian Subcontinent sector, returns have been far in excess of the peer group since its launch in July 2018. The trust has returned 109% in NAV terms, versus the peer group of between 22% to 38%, with outperformance driven almost entirely by stock selection.

“As a result, the shares trade at a small premium to NAV. The board has regularly issued shares in order to keep this in check, but the exceptional performance is arguably worth a premium rating.”

Another trust worth a look despite its premium rating is Odyssean Investment Trust, which was also launched in 2018 and operates in the IT UK Smaller Companies Sector.

The fund has a market cap of £183.2m and has been trading on a 0.6% discount on average over the past five years. However, it is currently trading on a 1.5% premium.

Ben Mackie, fund manager at Hawksmoor Fund Managers, who holds the trust in his portfolios, highlighted its unique builds significant stakes in businesses to drive self-help and change via active engagement.

He said: “The resulting high conviction, concentrated portfolio (73% in the top 10) would be extremely difficult to replicate in a daily dealing fund.

“The trust is also presently the only way of accessing the highly talented management team of Stuart Widdowson and Ed Wielechowski, who have built up a fantastic track record.” Odyssean sits in the top quartile of the IT UK Smaller Companies sector over five years.

Total return of trust vs sector since launch

Source: FE Analytics

Mackie added: “Given its investment process, the trust has been a significant beneficiary of M&A, and we would expect this to continue in the future as private equity and trade buyers look to take advantage of the extreme value on offer in the UK market.

“With most other UK small-cap trusts trading on steep discounts, there is of course a chance that the shares de-rate, although there are provisions in place mitigating this risk, including a discount control mechanism (buy backs triggered at certain discount thresholds) and, perhaps more importantly, an exit opportunity in May 2025 at NAV less cost.”

A trust in the IT Japanese Smaller Companies sector shares some similarities with Odyssean: AVI Japan Opportunity Trust.

In addition to trading on a premium (currently 0.7%), it was also launched in 2018 and shares the activist approach to investing. Moreover, the trust also has a concentrated portfolio, with the top 10 holdings accounting for 69.9%. A last commonality is their relatively high OCFs (1.4% for Odyssean and 1.56% for AVI Japan Opportunity).

James Carthew, head of investment company research at QuotedData, said: “AVI Japan Opportunity’s focus on adding value by encouraging good corporate governance amongst undervalued small- and medium-sized Japanese businesses has delivered good returns to its investors, with its NAV returns ranking top in its sector since it was launched.  

“The manager has plenty of potential investments available to it and is using the proceeds of recent share issuance to build up its firepower, which should be beneficial to its returns.”

Total return of trust vs sector and benchmark since launch

Source: FE Analytics

The trust sits in the first quartile of the IT Japanese Smaller Companies sector over three years as well as the past 12 months. It was only been beaten by its activist investor rival Nippon Active Value Fund in those periods.`

Carthew added: “As in other markets, small-caps have lagged large-caps – which presents a valuation opportunity. There is hope too that after a long period of a weak Japanese yen, which has acted as a headwind to the trust’s returns, this may change.

“As the focus is predominantly on businesses servicing the domestic market rather than exporters, a stronger yen shouldn’t be a problem.”

Lastly, Henderson High Income Trust is the only trust in the list with a multi-asset mandate, blending UK equity income and corporate bonds to deliver a high yield.

The trust, which is the only constituent of the IT UK Equity & Bond Income sector, is currently trading on a 1.8% premium, although it has traded on a 3.1% discount on average over the past five years.

Total return of trust vs benchmarks over 10yrs

Source: FE Analytics

Carthew highlighted the attractive dividend yield (currently 6.3%) as well as the 10-year track record of annual dividend increases.

He added: “The extra income that the bond portfolio provides means that the manager can avoid high-yielding value traps in his equity portfolio and focus instead on companies with growing profits and dividends.

“That, in turn, means that the trust’s long-term total return performance stacks up well against trusts in the UK equity income sector – it would rank 7th of 21 funds over 10 years in NAV terms were it a constituent of that sector.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.