Big moves in the discount/premium are often followed by a sharp reversion to the mean, which can result in investors giving back much of the gains they made in the first place.
Take the Aberdeen New Thai IT, for example: just a matter of weeks ago the trust was trading close to NAV, but the discount moved back in line with its three-year historical average of around 14.5 per cent. Over the same period, the trust is down more than 20 per cent on a total return basis.
With this in mind, FE Trustnet looks at investment trusts across a number of different sectors that have seen their discount narrow significantly relative to their one- and three-year historical averages, starting with the three UK equity sectors.
Aberdeen Smaller Companies High Income IT
The £52.6m Aberdeen Smaller Companies High Income Investment Trust has become very popular with investors in recent months.
According to the AIC, its discount has closed to just 2.74 per cent, compared with a three-year average of 14.89 per cent and a one-year average of 10.6 per cent.
The narrowing discount is understandable, given the fund’s outperformance relative to its benchmark – the FTSE Small Cap ex IT index – over the short-, medium- and long-term.
The trust has a particularly good record over one year, with returns of 71.61 per cent, beating the index by 26.57 percentage points.
Performance of trust vs index over 1yr
Source: FE Analytics
Winterflood’s Innes Erquhart says that the trust is by no means a value play, but does not think investors should be actively avoiding it.
"The recent tightening of the fund's discount means it no longer represents a value opportunity, although it has a solid medium-term performance record and also benefits from the expertise of the wider Aberdeen UK equities team," he said.
"The fund's geared allocation to fixed income also allows it to pay a dividend that is significantly higher than the majority of its UK smaller companies peers and consequently for investors seeking income from small caps we believe it is still an attractive proposition," he added.
Urquhart points out that the majority of trusts in the sector have seen their discount narrow, though not to the same extent.
The Aberdeen Smaller Companies High Income IT – which is managed by Phil Webster – is highly geared at 22 per cent, which has undoubtedly aided the trust’s recent performance.
It is currently yielding 3.25 per cent. Our data shows that it has maintained its net distribution over one year, despite the fact the headline yield has dropped from more than 5 per cent.
Webster locates that yield from a portfolio of equities, convertibles and fixed income, with bonds making up 17.2 per cent of AUM.
The trust has ongoing charges of 1.92 per cent, and sits in the IT UK High Income sector.
UK Select Trust
Like Aberdeen Smaller Companies High Income, Simon Brazier’s UK Select Trust has also seen its discount narrow substantially, from a one-year average of 5.72 per cent to a premium of 2.97 per cent. The trust’s three-year average is even wider, at 11.45 per cent.
The Guernsey-domiciled investment trust has returned 44.95 per cent over one year, nearly doubling the returns of the FTSE All Share over the period.
Performance of trust vs index over 1yr
Source: FE Analytics
The UK Select Trust has also beaten its benchmark over three, five and 10 years. Although it sits in the IT UK Growth sector, it is currently yielding 4.29 per cent, which has contributed to its popularity with investors, especially as it has grown its dividend in recent years.
Sarah Lewandowski, research analyst at Numis Securities, says that although the trust is looking more expensive, a big part of this is down to the management team’s share buy-back strategy.
"It is now trading on a premium, but discounts have closed across the sector recently, which is a function of the market," she said.
"The trust has also become more active in its share buy-backs recently, which will have certainly had an impact on the closing discount."
"However, those buy-backs are good for investor sentiment as it is a message from the board that they won’t allow the trust to languish on a wide discount."
Brazier has a large cap bias within his portfolio of 77 holdings. He counts UK blue chips such as GlaxoSmithKline, Unilever and AstraZeneca in his top-10.
The trust has ongoing charges of 1.91 per cent.
Capital Gearing Trust
The Capital Gearing Trust is trading on a wide premium of 16.6 per cent, compared with a three-year average of 10 per cent and a one-year average of 10.72 per cent.
Oriel Securities’ Tom Tuite-Dalton believes the five crown-rated investment trust deserves a huge amount of investor interest, but acknowledges that its premium is higher than normal.
"It has a very good management team and is always trading on a premium, and justifiably so in my opinion," he said.
His thoughts are echoed by Lewandowski, who says that while it may look very expensive, she is not overly concerned about Capital Gearing’s wide premium.
"Obviously, markets have been very favourable for the trust and given how difficult the last three years have been, it isn’t surprising the premium has widened," she said.
"Generally the peer group is trading on a smaller discount than over the last three years."
"At 16 per cent, it certainly isn’t looking cheap. However, though the market does look expensive, there isn’t any selling pressure coming through at the moment," she added.
The Capital Gearing Trust has been managed by the long-serving Peter Spiller since 1982.
Its defensive qualities have made it very popular with investors in recent years. Spiller has successfully protected capital in falling markets, and the trust made 3.2 per cent in 2011 and 4.72 per cent in 2008.
It has returned 75.72 per cent over the last five years, beating its benchmark – the Libor 3m index – which has made just 7.02 per cent. It has also beaten the FTSE All Share, with significantly less volatility.
Performance of trust vs index over 5yrs
Source: FE Analytics
Capital Gearing invests in other investment trusts, including those with a focus on equities, fixed interest, private equity and property. It also holds preference shares.
In spite of the trust’s multi-asset focus, it sits in the IT UK Growth sector.
It is not geared and has ongoing charges of 1.29 per cent.
