Average discounts for the investment trust sectors remain at historically narrow levels but there are pockets of value, according to analysts.
Despite volatility picking up throughout the year so far, on investment trusts’ average discounts remain tight compared with their historic averages.
Indeed, of the 35 sectors in the Association of Investment Companies (AIC) universe, half (17) are less than 2 percentage points away from their five-year average premium or discount.
Below, FE Trustnet looks at some of the sectors that are furthest away from this average, considering if they represent good or poor value for investors.
One of the sectors that has deviated the most from its average is the IT Infrastructure, which has been on an average premium over the past five years of 10.44 per cent but is currently on a premium of 2.54 per cent.
Performance of sector over 5yrs
Source: FE Analytics
Investec investment trust analyst David Elliott said that the premium pullback suggests there is value at the current levels.
He said: “Those companies holding PFI/PPP have experienced a reduction or removal of their premium after [shadow chancellor] John McDonnell announced at the Labour Party conference that, under an incoming Labour government, no new PFI deals would be signed and that they would look to bring existing contracts back in house.”
This, coupled with double-digit premiums and a normalising bond yield environment as well as the collapse of Carillion, has cast yet more doubt on the issue of counterparty risk. However, there have been some encouraging developments in the infrastructure space.
“We have seen a bounce post an announcement by John Laing Infrastructure about a possible cash offer for the company, which in our view highlights demand for these assets,” Elliott said.
The potential offer is at a 19.8 per cent premium to net asset value (NAV) and the sector has re-rated slightly following this announcement.
“We also note this offer is at a similar level to a transaction by HICL Infrastructure in April this year, which sold Highland Schools PPP2 Project at a 20.9 per cent premium to NAV, going in some way to validating the potential offer price,” he added.
“[However] despite this bounce, a number of names are still trading below their previous highs in terms premium to NAV.”
Currently the firm has a ‘buy’ recommendation out on BBGI Sicav and International Public Partnership, with ‘holds’ on HICL and John Laing Infrastructure.
Another sectors that has seen its discount/premium slip is IT North American Smaller Companies, which is currently on a 16.44 per discount while it has, on average, traded at a discount of 13.25 per cent over the past five years.
Despite this the sector, which is made up of just three trusts, has been a strong performer so far this year, up 11.17 per cent in sterling terms.
Both JPM US Smaller Companies and Jupiter US Smaller Companies have outperformed their large-cap focused counterparts in 2018.
The sector has benefitted from the double-whammy of the demand for US equities and an additional boost for the US domestic story from the promise of reflation and an eye-catching tax cuts from Trump, according to Peel Hunt’s Anthony Leatham.
The head of investment company research said: “More recently the emphasis has since shifted to a more challenging foreign policy and trade environment, which could encourage holders to take profits.”
Over the past five years the sector has seen its average discount narrow to as little as 8.04 per cent, while at its widest it hit 17.28 per cent.
At the other end of the spectrum, a sector that is on a much tighter discount to its five-year average is IT Private Equity, which is on a 1.13 per cent discount – the tightest it has been over the period.
Over the past five years it has averaged a discount of 14.92 per cent, although at its widest it reached 24.29 per cent.
Despite this, Simon Elliott, head of research at Winterflood Investment Trusts, said the sector is “one of the few genuine value opportunities in the investment trust universe”.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The sector has returned 61.17 per cent over the last five years, as the above chart shows, although much of this comes from one trust.
Indeed, despite being made up of 21 members, the sector is dominated by the £9.1bn 3i Group trust, which has skewed the data somewhat and is responsible for a large amount of the move upwards of the discount.
The trust’s shares are currently on a 27.02 per cent premium to NAV. While it has averaged a premium of 22.95 per cent at one point it did fall to a discount of 1.43 per cent over the period.
Elliott said there are “a number of well-managed funds on attractive discounts” in the sector with ICG Enterprise (10 per cent discount) and Standard Life Private Equity (14 per cent) among his current picks.
Peel Hunt’s Leatham noted that the private equity sector, however, is cyclical in terms of the underlying trust valuations.
“We hear from a number of managers that it is a sellers’ market and this may give investors confidence that realisations will continue to come in ahead of carrying values,” he said.
While 3i does indeed dominate the sector, he said other factors such as activism at Electra Private Equity, the introduction of dividend policies and vehicles moving to wind-up have also contributed to the average discount move.
Another to see its discount tighten recently is the IT Global Smaller Companies sector, which is currently on a discount of 13.48 per cent against its five-year average of 18.32 per cent.
The trust is still somewhere in the middle of its range however, having been as tight as 7.27 per cent and as wide as 22.44 per cent over the period.
Over the past five years the sector, which is made up of just three trusts – Oryx International Growth, Marwyn Value Investors and Scotgems – has returned 34.12 per cent in sterling terms.
Performance of sector over 5yrs
Source: FE Analytics
Leatham said however that the sector is not as cut-and-dry as those mentioned above, noting: “There are three small trusts in this space which will behave quite differently in NAV performance terms and discount volatility.”
As such, he added: “The go-to global small cap trusts are in the Global sector – Edinburgh Worldwide and F&C Global Smaller Companies and there are plenty to choose from across the regional small cap specialists.”