The average discount to NAV across the three main UK investment trust sectors narrowed considerably on Friday following the EU referendum result, according to data from the Association of Investment Companies, suggesting many investors saw the Brexit-induced volatility as an opportunity to buy into the market. 
The impact of the UK’s decision to leave the EU on Thursday was immediately felt in financial markets, especially as many had prepared for a narrow victory for the Remain camp.
Indeed, sterling fell to its lowest level relative to the dollar since the mid-1980s, 10-year UK gilt yields dropped to historic lows while the FTSE 100 plunged 10 per cent instantly after opening.
However, equities recovered significantly throughout the remainder of the session to end the day 3.15 per cent down and data from the likes of Hargreaves Lansdown suggests retail investors used the chaos as an opportunity to buy bombed-out assets.
This is particularly shown in investment trust land.
Though uncertainty prevails (especially following David Cameron’s resignation, serious rifts within the Labour party and murmurings of a controversial move to stop Brexit happening), discounts within the IT UK Equity Income, IT UK All Companies and IT UK Smaller Companies narrowed on Friday.
Discounts on UK investment trusts
Source: The AIC
A previous FE Trustnet article showed the general sense of nervousness prior to the referendum had an impact on discounts, as some 88 per cent of UK trusts were trading on a wider discount than their one-year average. Overall, the average discount across the three peer groups was 6.97 per cent, according to the AIC.
However, today the average discount stands at 6.12 per cent despite the market noise surrounding the Brexit vote.
That is because 55.17 per cent of trusts are currently on tighter discounts than on Thursday, meaning only 66.07 per cent of UK closed-ended funds are now on wider discounts than their one-year average.
One could, therefore, be forgiven for thinking that there were decent returns to be made on Friday within the UK closed-ended fund space.
However, volatility at an NAV level meant the vast majority of trusts posted losses in total return terms. Indeed, FE data shows the IT UK Smaller Companies sector fell 5.55 per cent, the IT UK All Companies sector fell 4.11 per cent and the IT UK Equity Income sector lost 2.62 per cent.
In fact, only one trust – JP Morgan Elect Managed Income – delivered a positive return on Friday with a gain of 1.53 per cent.
As an FE Trustnet study highlighted this morning, though, closed-ended UK funds generally held up better than the average unit trust and OEIC in the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies peer groups.
Performance of funds versus trusts on Brexit Friday
Source: FE Analytics
Of course, volatility is likely to be a persistent factor over the coming weeks and months and many investors will want to wait for the dust to settle before making any high conviction bets on UK equities.
Certainly, the team at Numis Securities says investors shouldn’t come to any hard and fast conclusions about Brexit Friday.
“The investment companies (ICs) sector does not face the same pressure from potential outflows, and sterling weakness benefits many ICs given that circa 60 per cent of the underlying assets are invested overseas,” Numis said.
“On the other hand, uncertainty and market volatility inevitably has an impact on discounts in the sector and we believe that the effectiveness of some discount control mechanisms could be tested over the next few weeks.”
“We expect value opportunities to arise, but liquidity is patchy and NAVs are not always easy to estimate at times of rapidly moving markets and currencies.”
Nevertheless, which were the biggest movers and shakers in discount terms on Friday?
UK trusts with the biggest discount narrowing on Brexit Friday
Source: The AIC
Despite the fact that the FTSE 100 led the FTSE All Share on Friday, most of the trusts that saw the biggest discount narrowing focus on small or mid-caps.
Sitting at the top of the list, as the table above shows, is FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies Trust. On Thursday, its discount stood at 9.87 per cent but that has narrowed by 6.69 percentage points to 3.18 per cent today.
Other trusts to feature on the list include Schroder UK Mid Cap, Henderson Smaller Companies and Standard Life Equity Income which all saw their discounts narrow by more than 3.3 percentage points, while the Aurora Investment Trust (which has recently seen demand for its shares increase significantly following a change in management) jumped from a 0.92 per cent discount to a 5.42 per cent premium.
As the table shows, though, there seems to be little correlation between discount movements and which areas of the UK market fared best and worst following the Brexit vote.
This is illustrated even more clearly when it comes to the list of trusts that saw the biggest widening in discounts on Friday.
UK trusts with the biggest discount widening on Brexit Friday
Source: The AIC
For example, Job Curtis’s City of London Investment Trust – which has a bias towards mega-cap dividend paying companies with international earnings (stocks that largely fared best on Friday) – is on the list as it saw its discount widen by 0.83 percentage points.
On the other hand, the Athelney Trust – which focuses on small-caps that are more domestically orientated – also features as its discount widened by a hefty 10.64 percentage points.
Liquidity could be the major driver behind the trend, therefore. That is because as the City of London trust is one of the largest and most liquid available, it is likely to be one of the easiest within a portfolio for an investor to sell if they want to reduce UK exposure.
In contrast, given Athelney is very small, it could only take one large shareholder to dump their shares to have a profound effect on the discount.
Either way, it is worth noting that Athelney – which is has total assets of just £4.8m and is managed by Robin Boyle – is currently trading on its widest discount than at any point of the past 12 months at 18.3 per cent thanks to Friday’s selling.
Indeed, FE data shows it was the worst performer out of the three peer groups as investors in the trust would have lost a hefty 14.29 per cent in total return terms.