IT UK Growth & Income has had huge inflows from investors in recent months, but the investment trust analyst thinks some of the highest profile vehicles are looking increasingly expensive.
"The danger is that if investors buy in on a "big" premium and the shares subsequently fall to trade on a significant discount," he said, "The relative de-rating can result in some extremely poor relative price performance."
"Many of these funds have been issuing shares to try and satisfy investor demand. We think this is the right course of action by the boards and we view a big premium – that is to say more than 2 to 4 per cent – to be as much of a problem as a big discount."
One investment company that Scouller believes is particularly vulnerable to a de-rating is Henderson International Income. This newly launched trust is trading on an 11 per cent premium to the net asset value (NAV) of 84p, which has fallen from 98p at the time of issue in April this year.
He also highlights the £390m Murray Income investment trust, which is managed by Aberdeen’s Charles Luke, and Jeremy Whitley’s Dunedin Income Growth investment trust as potential banana skins for new investors.
"It is trading on a 5 per cent premium, which compares with a six-month range of a 3 per cent discount to a 5 per cent premium," he said.
"Dunedin Income Growth is trading on a 5 per cent premium and this is also at the top-end of the six-month range of a 5 per cent discount to a 5 per cent premium."
According to FE Analytics data, both funds have beaten their sector and FTSE All Share benchmark over one-, three- and five-year periods.
Performance of trusts over 10-yrs
| Name |
1-yr (%) |
3-yr (%) | 5-yr (%) | 10-yr (%) |
| Dunedin Income Growth Trust |
4.53 |
23.8 |
10.91 |
63.59 |
| Murray Income IT |
2.97 |
23.27 |
15.04 |
98.93 |
| FTSE All Share |
-2.53 |
9.62 |
7.87 |
65.19 |
| IT UK Growth & Income |
0.89 |
7.51 |
-6.04 |
58.99 |
Source: FE Analytics
The investment trust analyst also says there is a lack of decent value in the IT Asia Pacific ex Japan Equities sector.
"Expensive Asian trusts include Aberdeen Asian Smaller, which is on a 3 per cent premium with a six-month range of a 10 per cent discount to a 5 per cent premium. Henderson Far East Income is trading on a 6 per cent premium, compared with a range of a 1 per cent discount to a 6 per cent premium," he explained.
Scouller says investors looking for cheaper valuations should look to UK small and mid cap, US small cap, environmental and specialist mining investment trusts.
He commented: "Mercantile is trading on a six-month wide discount of 13 per cent and continues to represent, in our view, a well managed, low-cost sub-contract for UK small and mid cap exposure."
"Environmental funds remain out of favour as the positive macro story fails to be reflected in NAV returns. This week’s disappointing news with regard to Low Carbon Accelerator (LCA), which saw the share price fall by some 45 per cent yesterday, may well further harm confidence in the short-term."
"[The] top-performing fund over five years, City Natural Resources, is currently trading on an 18 per cent discount, having been as narrow as 7 per cent in the last six months."
For more adventurous investors, Scouller recommends the frontier market as a potentially good entry point.
"Frontier markets are arguably still under-owned and valuations more attractive than BRIC markets. BlackRock Frontiers, for example, has seen a discount emerge," he added.