Henderson Smaller Companies, Chelverton Growth and the Rights & Issues investment trusts have outperformed the FTSE All Share index over at least three and five years and are currently trading on discounts of more than 10 per cent.
The data, retrieved from FE Analytics and The Association of Investment Companies, follows commentary from a number of investment professionals who believe the lower end of the market cap spectrum in the UK is yielding attractively priced opportunities.
In an article published earlier this month, Rathbone’s Alex Moore told FE Trustnet that smaller, domestic-facing UK stocks are appealing on valuation grounds, given that they have generally underperformed large-caps over the last year.
Performance of indices over 1yr
Source: FE Analytics
“The companies tend to be under-researched, so can offer an interesting opportunity set with higher growth potential. However, much depends on an investor’s appetite for risk, as the sector can be volatile and usually requires a longer time horizon,” he said.
While the small and mid-cap space tends to outperform over the long term, nerves surrounding Brexit and the subsequent plummet in sterling led many investors to pile into global-facing mega-caps.
This trend has already started to reverse over recent months as murmurings of fiscal expansion in the UK have bolstered market sentiment.
As such, investors may wish to take a look at the closed-ended funds in this area of the market to utilise discounts and minimise valuation risk.
In the below article, we take a look at the heavily-discounted trusts in the IT UK Smaller Companies sector that have achieved strong long-term returns (with the usual caveat that past performance is no guide to future returns) versus the FTSE All Share index.
Henderson Smaller Companies: 17.3 per cent discount
First up is the £494m Henderson Smaller Companies trust, which has been headed up by Neil Hermon since 2002.
Over this time frame, it has returned 933.5 per cent compared to its sector average’s return of 565.43 per cent and its Numis Smaller Companies excluding Investment Companies index’s return of 525.21 per cent. It has also comfortably outperformed its average peer, benchmark and the FTSE All Share index over three, five and 10 years.
Performance of Henderson Smaller Companies vs sector, benchmark and index since launch
Source: FE Analytics
The trust has a diversified portfolio of 111 holdings, with the largest including the likes of Bellway, NMC Health and investment company Melrose Industries. Despite this, it is still in the third quartile for its annualised volatility over five years due to the small market caps of the firms it invests in.
It has managed to grow its dividend each year over the last decade and, over five years, it has a dividend growth of 22.2 per cent per annum.
Henderson Smaller Companies is 7 per cent geared, yields 2.3 per cent and has an ongoing charge of 0.44 per cent.
Chelverton Growth: 14.4 per cent discount
Next up is the five crown-rated Chelverton Growth trust, which has been managed by David Horner and David Taylor since 1998 and 2006 respectively.
While it is just £4m in size, it is available on most investment platforms and invests predominantly in AIM stocks or, at times, unquoted companies.
As such, the trust is perhaps not for the faint-hearted. It has an FE Risk Score of 341, which predicts that it is almost three and-a-half times riskier than the FTSE 100 index.
Over five years, it has a maximum drawdown – which measures most money lost if bought and sold at the worst possible times – of 53.85 per cent.
That said, it has significantly outperformed its sector average over one and three years and, over five years, it has more than doubled the FTSE All Share’s 59.69 per cent total return.
It has underperformed over the last decade, however, due to losses made in 2008 and 2009.
Chelverton Growth isn’t geared and, in terms of charge to capital, has a management fee of 1 per cent per annum.
Aberforth Geared Income: 13.7 per cent discount
Another trust that may not be suited to the more cautious investor, Aberforth Geared Income lives up to its name and uses gearing to maximise positive returns. While the trust can be up to 75 per cent geared at times, it is currently near the very bottom of its range at 40 per cent.
Of course, this can also magnify any losses made and as such, the £350m trust has a higher annualised volatility and maximum drawdown (which stands at 15.74 per cent) than its average peer and the FTSE All Share index over five years.
However, the trust – which was launched in 2010 - has comfortably outperformed its average peer over one, three and five years.
Performance of Aberforth Geared Income vs sector and index over 5yrs
Source: FE Analytics
In terms of income, the trust currently yields 4.5 per cent and, if an investor had placed £1,000 into the fund five years ago, they would have received £489.35 in income alone.
It is a split capital investment trust, which means it has both premium and standard listings on the stock exchange.
The managers adopt a value approach when it comes to stock selection, with the fund counting the likes of Hilton Food Group, Galliford Try and Ladbrokes Coral Group in its list of top 10 holdings.
Aberforth Geared Income charges 0.9 per cent of the company’s net assets plus 5 per cent of the total income.
Rights & Issues: 12.8 per cent discount
The final fund on the list is the five crown-rated Rights & Issues trust, which is £181m in size and aims for both capital and income growth through its holdings in small and medium-sized companies. It has a high conviction portfolio, with its largest holding – Scotch whisky distillery Scapa – accounting for 11 per cent of its AUM.
Other large holdings include tool rental service company VP Plc at 8.7 per cent, RPC Group at 8.1 per cent and infrastructure product manufacturer Hill & Smith Holdings at 7 per cent.
The trust has achieved top-quartile returns over one, three and five years and has comfortably outperformed its sector and benchmark over the last decade with a total return of 168.76 per cent.
Given its highly concentrated portfolio though, it has doubled the annualised volatility of its FTSE All Share benchmark over five years and has a maximum drawdown of 19.32 per cent.
In terms of its income, it has grown its dividend by 6.1 per cent per annum over the past five years and currently yields 2 per cent.
Rights & Issues is not geared and charges information is not widely available.