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How the premium/discount is affecting these investment trusts

16 March 2017

Killik looks at premium/discount issue for investments trust and outlines two top performing funds it likes and doesn’t like based on valuations.

By Jonathan Jones,

Reporter, FE Trustnet

Whether or not an investment company looks expensive or cheap can be difficult, particularly when it comes to premiums and discounts. 

The shares of closed-ended funds (investment trusts) are subject to supply and demand and in practice this means over the short-term share prices can vary considerably from the underlying net asset value (NAV).

Some sectors lend themselves to premiums, such as the aviation leasing sector which currently sits on a premium of 53.1 per cent to NAV. While others, such as the P2P lending sector which is on a 7.1 per cent discount, do not.

In fact, share prices that trade at a discount to NAV are the norm for closed-ended funds, according to analysts at Killik.

However, investors should not be put off a trust trading at a discount if hen the fundamentals remain strong.

“We regularly screen for instances where these discounts become unduly wide or narrow (or where premiums develop) and do not adequately reflect the short-term risks to performance or opportunities to make gains,” they said.

Below Killik highlights two closed-ended funds which, at current valuations, they think look particularly expensive or attractive from a discount perspective.

 

Genesis Emerging Markets - Attractive

The £996m Genesis Emerging Markets trust run by Andrew Elder is on a 13 per cent discount, according to data from the AIC, making it look cheap compared to the sector.

Indeed, as at the end of February (the latest available data), the IT Global Emerging Markets sector was on an 11 per cent discount.

Currently, the trust on the largest discount is Ashmore Global Opportunities (21 per cent) while Blackrock Frontiers is on a 3.2 per cent premium – the highest in the sector.

Over the last decade the fund has returned 133.22 per cent, 14.72 per cent more than the MSCI Emerging Markets IMI index, though it has lagged over three- and five-year periods.

Performance of trust vs benchmark over 10yrs

 

Source: FE Analytics

“This closed-end, Guernsey-registered, London-listed investment company aims to achieve long-term capital growth, primarily through investment in equity markets of developing countries,” Killik said.

“The management company specialises in emerging market investment and has a large investment team carrying out its own fundamental research.” 

The fund is 16.1 per cent invested in Chinese equities with 14.9 per cent allocated to Indian stocks, but also tends to have a higher allocation to frontier markets than the average emerging markets investment trust.

“The team’s investment approach is to identify companies which are able to take advantage of growth opportunities in emerging markets and invest in them when they are trading at an attractive discount to their estimated intrinsic value,” the firm noted.

“The fund achieved strong NAV returns in 2016 (32.7 per cent), broadly in line with that of the index and benefitting from the translation impact of weakening sterling against overseas currencies following the EU referendum.

“Despite these strong returns, the team remains optimistic on expected returns from the emerging market region as economic growth has finally begun to stabilise after five years of sequential declines.

“Whilst the team accepts the risks associated with the credit build-up in China and potentially protectionist rhetoric from president Trump, it believes that the long-term emerging market investment opportunity remains bright.

The Genesis Emerging Markets share price (642.5p) has lagged the continued NAV returns seen so far this year, causing the discount to widen to the bottom-end of medium term trading ranges.

The fund has a clean ongoing charges figure of 1.43 per cent

 
JP Morgan US Smaller Companies - Expensive 

“This London-listed trust aims to provide investors with capital growth by investing in US smaller companies,” Killik said. 

The portfolio is managed by a US-based investment team at JPMorgan led by Don San Jose and Daniel Percella who aim to invest in well-run companies with attractive and sustainable profits from the potentially faster growing smaller companies segment of the US stock market.


The trust is one of three in the IT North American Smaller Companies sector, but is on a substantially lower discount (1.1 per cent) than its peers Jupiter US Smaller Companies (10.6 per cent) and North Atlantic Smaller Companies (19.7 per cent).

Performance of trusts vs benchmark over 10 years

 

Source: FE Analytics

The team has a strong track record having outperformed the benchmark Russell 2000 Index over three, five years and 10 years.

As the above graph shows, the trust has been the top performer over the last decade, returning 244.97 per cent.

“Portfolio returns have kept pace well with the very strong returns achieved from US smaller companies in the 2016 election year,” Killik said.

Indeed, the election result spurred a rally in US smaller companies as increased infrastructure spend and corporate tax cuts are expected to be two of the primary mechanisms for the Trump administration’s economic policy.

However, whilst the US small cap equity rally may have further legs to run in 2017 as the market receives more detail on the policy agenda from the Trump administration the JP Morgan US Smaller Companies share price has moved from a double-digit discount earlier in 2016 to almost par today, Killik says.

“This rating increases the risk should market sentiment decline and we prefer alternative offerings for exposure,” the analysts said.

“The trust (along with other sector peers) has historically traded at a discount to NAV and the trust does not have a defined discount control policy.”

As well as this, in the last interim report (published in August 2016 when the shares were trading on a discount) the board referenced a reluctance to buying back shares to protect the discount as exacerbating the illiquidity of the shares is often quoted as a concern for prospective and existing shareholders.

JPMorgan US Smaller Companies is seven per cent geared (with a maximum borrowing level of up to 15 per cent) and has an OCF 1.69 per cent, according to the latest data from the AIC.

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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.