Some 16 out of 24 trusts in the IT Global sector are trading on discounts, according to AIC data, seven of which have managed to outperform their average peer as well as the FTSE All Share and FTSE All World indices (both of which are commonly-used benchmarks in the sector) over the last five years.
However, industry professionals warn that this doesn’t automatically make them a ‘bargain’ investment.
Trusts in the IT Global sector are trading on an average discount of 4.3 per cent; this includes data from the Lindsell Train trust which is currently on a hefty 30.7 per cent premium.
While this can be a sign of overall bearishness towards an entire sector and therefore open-up buying opportunities, it goes without saying that due diligence must be done beforehand.
As such, we asked investment trust specialists for their thoughts on whether the discounted trusts in the IT Global sector which have outperformed the aforementioned indices over five years – listed in the below table – could be seen as attractive ‘buy’ opportunities at the moment.
Source: FE Analytics
The £1.9bn Caledonia Investments trust is trading on one of the widest discounts in the sector at 17.1 per cent.
Despite residing in the IT Global Sector, it is benchmarked against the FTSE All Share and currently has a 51 per cent regional weighting to UK equities. It adopts a value approach to buying both listed and private businesses with the aim of generating capital growth as well as a growing stream of income. It has a notably long investment time horizon of 10 years and looks for stocks where the return of capital employed is a differentiator of longer term performance.
It has doubled the return of its benchmark and comfortably outperformed its average peer by 30 percentage points over five years with a return of 123.04 per cent. Over the last decade, however, it has underperformed its benchmark and average peer by 5.55 and 39.68 percentage points respectively with a total return of 64.47 per cent.
Ben Conway, senior fund manager at Hawksmoor, says it is trading on a wider discount relative to its peers because of its direct and indirect exposure to unquoted investments, which currently stands at around 30 per cent.
“On the one hand, investors should expect the discount to be wider than the peer group, but on the other, there remains plenty of scope for this discount to narrow,” he explained.
“First, private equity trusts have been reporting very healthy results of late and Caledonia’s UK-focused portfolio has been performing well.
“Indeed, we would view this point of differentiation versus the global peer group positively since private equity investments are generally delivering superior sales and earnings growth to listed companies. Second, the company will be buying back shares should the discount widen too far.”
Aside from Caledonia, the team at Hawksmoor does not have a particularly strong view on the trusts listed above.
“Alliance Trust’s recent corporate action obviously explains the recent significant discount narrowing and I am not sure that there is much more room for this to narrow further,” Conway continued.
“Smaller trusts, like Majedie, are rarely supported by the super-wealth-management groups and so their share prices can drift away from their NAV [net asset value], which appears to be happening of late with that one.”
Charles Murphy, listed investment companies analyst at Panmure Gordon & Co, says one of the reasons Majedie is currently trading on a discount is because pensions giant Aviva has been reducing its investment trust holdings in the Friends Life portfolio, which it acquired last year.
The five crown-rated trust, which is trading on an 8.9 per cent discount, has outperformed its average peer by 40.05 percentage points over five years with a total return of 128.62 per cent.
Benchmarked against a composite of the FTSE All Share and the FTSE All World ex UK indices, it aims to provide capital growth and a growing stream of income through a combination of Majedie’s funds and individual stocks and shares. Its largest holding is Majedie Asset Management itself at 25.7 per cent.
Performance of trust vs sector and composite benchmark over 5yrs
Source: FE Analytics
“It is not necessarily trading on that steep a discount because of its long-term debt and there are always question marks as to what fair value is,” Murphy explained. “What is attractive is its investment stake in a very successful investment business – Majedie – and that is a very strong value driver going forwards.
“One of the reasons it is trading on a discount at the moment is that it’s in a Mexican stand-off with Aviva about the stake there. Until that is resolved, I think investors are going to wait and ensure that it is resolved before they take it forward. It’s a question of a negotiated settlement.”
There is a wide range of reasons as to why the trusts on the above list are trading on discounts.
Innes Urquhart of Winterflood Investment Trusts says Foreign & Colonial’s 2016 underperformance relative to its benchmark, for instance, may have led to its 7.6 per cent discount. He says its underperformance can be attributed to its underweight exposure to the US and a strong performance by global equity indices.
While it struggled during 2016, it has outperformed its average peer over three, five and 10 years.
“Notwithstanding last year, the fund's medium and longer‐term performance record remains reasonably solid, particularly when looked at relative to peers or on a risk-adjusted basis,” the research analyst said.
“We also think the changes that have been instituted over recent years have increased its attractiveness as a well‐managed, relatively low cost, savings vehicle providing genuinely global exposure to equities.
“In particular, the decision to retain exposure to private equity was a positive one, and the new, lower cost, strategy of making direct commitments to LPs seems entirely sensible. At its current discount of 7.6 per cent the trust currently offers some value relative to other large global 'generalists' such as Alliance Trust, Witan and Bankers.”
That said, the team at Winterflood still believes Alex Crooke’s £965m Bankers investment trust – which is currently trading on a 5.06 per cent discount - is an attractive proposition.
Over five years, the highly-diversified trust, which consists of around 200 holdings, has returned 105.63 per cent compared to its sector average and benchmark’s respective returns of 88.29 and 60 per cent.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
“We believe that Bankers offers well-managed, low-cost core global equity exposure and is particularly well-suited to retail investors,” Winterflood research analyst Emma Bird said.
“As well as strong long-term performance, its impressive record of 50 consecutive years of dividend growth is a major part of its appeal in our opinion, while its dividend yield of 2.4 per cent is supported by significant revenue reserves.”
The team is less positive on Alliance Trust, however, which is trading on a 4.31 per cent discount.
Over five years, it has returned 110.24 per cent compared to its average peer’s return of 88.29 per cent.
“In recent years the ‘buy case’ for Alliance Trust was centred on its discount level, which was consistently wider than its peers, and the potential value of its subsidiary businesses: ATS and ATI [Alliance Trust Savings and Alliance Trust Investments],” fellow research analyst Kieran Drake said.
“However, the fund is no longer cheap following the adoption of a 4.75 per cent discount target and an active buyback programme that has seen 29 per cent of the share capital bought back since December last year.”