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The outperforming UK trusts trading on double-digit discounts

01 August 2017

AIC and FE Analytics data shows six funds in the IT UK All Companies and Equity Income sectors trading on discounts to NAV of more than 10 per cent have outperformed the FTSE All Share over five years.

By Lauren Mason,

Senior reporter, FE Trustnet

JPMorgan Mid Cap, Henderson Opportunities Trust and Schroder UK Mid Cap are among trusts that have outperformed the FTSE All Share over five years but are trading on double-digit discounts, according to research from FE Trustnet.

Data obtained from FE Analytics and the AIC shows that, out of a combined 39 trusts in the IT UK All Companies and UK Equity Income sectors, six trusts are on discounts to NAV of more than 10 per cent but boast strong longer-term track records.

This follows an FE Trustnet article published last week, in which Alex Paget – research analyst at Kepler Trust Intelligence – explained why investors who avoid discounted trusts could miss out on significant gains.

“Not only have investors witnessed strong returns by backing trusts on a wide discount, but they have also been able to significantly outperform the wider market – both in terms of the IA UK All Companies sector and the FTSE All Share.”

As such, below FE Trustnet compiled a list of the UK equity trusts which are on double-digit discounts and have outperformed the FTSE All Share index over five years.

 

Source: FE Analytics

First up for its five-year total return of 196.03 per cent compared to the FTSE All Share’s return of 64.96 per cent is JP Morgan Mid Cap, which is currently trading on a 13.19 per cent discount. This is 2.92 percentage points wider than its one-year average discount and 4.59 percentage points wider than its three-year average discount.

While the trust has indeed performed well relative to the FTSE All Share and its average peer in the IA UK All Companies sector over three, five and 10 years, it has underperformed its sector average by 5.71 percentage points and its FTSE 250 (ex IT) benchmark by 1.73 percentage points over the last 12 months with a 15.45 per cent return.

Managers Georgina Brittain and Katen Patel adopt a bottom-up approach to stock selection which initially involves a quantitative screen followed by fundamental analysis. They aim to find companies which have positive earnings drivers but are undervalued by the broader market.

Examples of its largest holdings include JD Sports Fashion, equipment rental company Ashtead and software technology business Micro Focus International.

Victoria Chernykh, senior research analyst at Panmure Gordon & Co, said mid-cap trusts have generally been unpopular as the FTSE 250 is considered to be a proxy for the UK economy.

“Investors are nervous about Brexit process and consequences,” she said.

The £306m fund is 4 per cent geared, yields 2 per cent and has ongoing charges of 0.95 per cent.


Next up for its five-year total return of 141.79 per cent is Henderson Opportunities Trust, which is headed up by James Henderson. The £104m trust is currently trading on a discount to NAV of 19.7 per cent compared to its one-year average discount of 17.68 per cent and its three-year average discount of 12.48 per cent.

Despite its strong performance over five years – thanks to significant outperformance in 2012, 2013 and 2015, the trust struggled last year as it lost 5.56 per cent while its sector average and the FTSE All Share returned 3.81 and 16.75 per cent respectively. It has comfortably doubled its benchmark year-to-date with a total return of 13.03 per cent.

Performance of trust vs sector and benchmark over 5yrs

 

Source: FE Analytics

Henderson adopts a bottom-up, multi-cap approach to stock selection and currently has a portfolio of 99 stocks. He tends to focus on out-of-favour companies with strong cash generation abilities and is unafraid to hold early-stage university spinouts, recovery stocks and high-growth small-caps.

Henderson Opportunities Trust is 11 per cent geared, yields 2.1 per cent and has ongoing charges of 0.94 per cent.

Hot on its heels with a five-year total return of 133.15 per cent is Schroder UK Mid Cap which, as with JP Morgan Mid Cap, is benchmarked against the FTSE 250 (ex IT) index as opposed to the FTSE All Share.

While the £218m trust has comfortably outperformed its benchmark, the All Share and its average peer over five and 10 years, it has failed to do so over the last three with a total return of 19.22 per cent.

As a point of comparison, its benchmark returned 35.61 per cent over this time frame and its sector average returned 24.57 per cent. It is therefore currently trading on an 18.04 per cent discount compared to its one-year average discount of 17.72 per cent and its three-year average discount of 12.88 per cent.

The trust also yields 2.3 per cent and has ongoing charges of 0.94 per cent.

Monica Tepes, head of investment companies research at Cantor Fitzgerald Europe, deems the trust to be at an attractive entry point for purchase given its widening discount.

“For me the FTSE 250 is the sweet spot of UK equity investing and Schroder UK Mid Cap is one of only two trusts to target this area specifically,” she explained.

“Furthermore, veteran fund manager Andy Brough has achieved outstanding outperformance. The same as for most smaller cap funds however, despite the returns and the outperformance the shares have pretty much always traded at a discount.

“The current discount is wider than the long-term average and also not far from the 20 per cent level which historically has proved to be a good support level.”


Chernykh is also positive on the trust given the strength of its management team and the broad-sweeping bearishness on UK mid caps which, contrary to popular belief, receives 50 per cent of its underlying earnings from overseas.

“The discount narrowing, of course, equally depends on the sentiment towards the UK economy, as well as performance of the underlying companies (which I think will be solid) as well as trusts themselves,” she explained.

“I think one has a circa 50/50 chance of making money within the next couple of years, entering at this level.”

In fourth place for its five-year total return of 91.34 per cent is OLIM’s Value & Income trust, which is £210m in size and is trading on a 15.7 per cent discount to NAV.

Unlike the aforementioned trusts, it invests in both UK equities and direct property. The team at OLIM manages the equity element using a high-conviction, bottom-up approach to stock selection which often results in an overweight to small- and mid-caps relative to the FTSE All Share.

The property portfolio is managed by OLIM Property, which predominantly invests in properties let to “strong covenants on long and often index-linked leases”.

Given the well-publicised slowdown in UK house prices – not to mention the inflation-induced consumer squeeze – the fact it is trading on a discount may come as little surprise to investors.

The Value & Income trust is 30 per cent geared, yields 4 per cent and has ongoing charges of 1.42 per cent., according to data from the AIC.

Another trust on the list that may be unsurprising is Keystone investment trust, given star manager Mark Barnett’s recent step away from running the vehicle.

Now managed by James Goldstone, it is currently trading on a 10.65 per cent discount compared to its one-year average discount of 10.38 per cent and its three-year average discount of 6.96 per cent.

While it is in the bottom quartile over one and three years for returning less than half that of its average peer and benchmark, it has nevertheless outperformed the FTSE All Share by 3.47 percentage points over five years with a 68.43 per cent total return (this is still a notable underperformance relative to its sector average).

Performance of trust vs sector and benchmark over 5yrs

 

Source: FE Analytics

Tepes said: “James Goldstone took over from Barnett in April, having worked alongside him for five years.


“The trust is a good market cap (£235m), it pays an attractive yield (3.4 per cent) and, having traded inside the 5 per cent discount level for most of 2011-2015, the shares have de-rated to around the 10 per cent level over the last 18 months as one-year and three-year numbers have lagged the FTSE All-Share.

“Short of some very strong NAV outperformance in the short term, I think a quick re-rating of the shares is less likely given it is very early days for Goldstone as manager of the trust.”

Keystone investment trust is 6 per cent geared and has ongoing charges including a performance fee of 0.72 per cent.

The final trust on the list is Shires Income, which is managed by the team at Aberdeen and is trading on a 10.12 per cent discount. This has actually narrowed compared to its one-year average discount of 11.59 per cent but is nevertheless wider than its three-year average discount of 7.62 per cent.

Over five years, the IA UK Equity Income trust has returned 71.1 per cent.

The £102m trust is 19 per cent geared, yields 5.1 per cent and has ongoing charges of 1.04 per cent. 

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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.