In the investment trust world, the vast majority of those that pay out a decent dividend have seen their discounts come in significantly in the last four or five years, and most are currently trading at net asset value (NAV). Indeed, many are on heavy premiums, such as the British & American IT and Murray International IT.
There are a handful of income-focused trusts that remain attractively valued however. They’re not without their risks of course, particularly from a capital growth point of view. However, Oriel Securities’ Tom Tuite Dalton says that there are three in particular that are well worth a look.
NB Private Equity IT
NB Private Equity IT invests in private equity and private debt. It invests both directly and via other investment funds.
It is currently yielding 4.5 per cent and is on a discount of 28 per cent, making it one of the cheapest investment trusts on offer.
Tuite Dalton says that the trust’s focus on income in recent years has been successful, as has its greater emphasis on investing directly into companies. He thinks it could be set for a re-rating from a share price point of view, and is also confident that its yield is sustainable.
“NB Private Equity is making good progress with its higher yield strategy by increasing exposure to debt investments,” he explained.
“Having historically invested in funds, it has increased exposure to direct investments in both private equity and private debt.”
“As a result of this, the annual dividend of $0.41 – equating to a 4.5 per cent yield – is expected by management to be fully covered by revenue EPS by early 2014.”
“Despite this relatively high yield, NBPE is currently on a 28 per cent discount to cumulative income NAV, which is significantly wider than the majority of private equity funds.”
“We believe that this represents a significant anomaly and there is scope for a re-rating given that listed debt specialist funds are in demand, with several trading on a premium to NAV.”
Oriel currently has a buy recommendation on the trust.
BlackRock World Mining IT
Tuite Dalton also thinks BlackRock World Mining IT is an undervalued option at the moment, though acknowledges that the commodities sector is still facing headwinds in the short-term.
The trust, headed up by FE Alpha Manager Evy Hambro, is currently on a discount of 10 per cent. Hambro and his co-manager Catherine Raw have put more and more of a focus on income in recent months, with the yield now at a healthy 4.8 per cent.
Tuite Dalton points out that part of this increase in yield is a result of the trust’s falling share price, though.
“We would expect the trust to continue with its higher dividend policy on the assumption that mining companies do not cut dividends substantially. We view this as a contrarian play, given this is an unloved sector and sentiment remains poor. Our recommendation is positive,” he explained.
BlackRock World Mining IT has a very strong long-term record, though the poor performance of the mining sector has seen the trust make a loss over one and three years.
Performance of trust and indices over 3yrs
Source: FE Analytics
The trust has ongoing charges of 1.42 per cent and is 12 per cent geared.
Ecofin Water & Power Opportunities IT
This £355m trust invests in utilities, infrastructure and energy stocks around the world.
It is currently yielding 5.2 per cent and is trading on a 22 per cent discount, which is in stark contrast to the listed infrastructure funds operating in the AIC universe, many of which continue to trade on significant premiums and with lower yields.
The trust is highly leveraged at 56 per cent. It has been highly volatile since its launch in 2005, which is a result of its highly concentrated portfolio, which includes a 17.6 per cent position in US shale gas beneficiary Lonestar Resources.
Performance of trust and indices since launch
Source: FE Analytics
Tuite Dalton says these two factors have contributed to the trust’s high discount, but thinks there are signs the tide could turn in the near future.
“The high leverage of over 50 per cent is split between bank debt, zero dividend preference shares and convertible bonds,” he explained. “The zeros and convertibles have coupons of 6 and 7 per cent respectively and expire in 2016.”
“The capital structure should become simpler and leverage lower in the next two to three years and we think the fund should see a significant narrowing of the discount as we move towards the point when debt will be reduced.”
Ecofin Water & Power Opportunities IT is run by Bernard Lambilliotte. It has an annual management charge of 1.25 per cent, which excludes a performance fee. However, this extra cost is set to be removed in September of next year.
