Monks, Independent Investment Trust and JPMorgan Global Growth & Income are among the closed-end funds that have seen their discounts come in farthest from their five-year trough, according to the latest study by FE Trustnet.
Working out whether a trust is trading at an attractive discount or premium relative to its history can lead investors to pleasing or disappointing returns.
Many fund managers and investors of investment trusts look to the discount/premium to net asset value (NAV) as a standard when conducting their analysis to see whether a company can benefit from a ‘double-whammy’ of improving earnings and a price re-rating.
In this study, using data from the Association of Investment Companies (AIC), we considered the investment trusts that currently sit on a tighter premium or wider discount relative to their peak over the last five years. Although it should be noted all discount/premium figures are to the previous month-end.
Previously we have looked at the sectors that are on a wider discount or premium relative to their five-year history and the trusts that currently sit on a tighter premium or wider discount relative to their peak over the last five years.
Appearing at the top of the list is the £23m British & American trust, which sits in the IT UK Equity Income sector.
The trust has not traded at a discount in the past five years but was trading around par (0.13 per cent premium) at its lowest point in April 2015.
Since then, the investment company has risen to a current premium of 109.58 per cent to NAV, some 109.45 percentage points ahead of its trough but also 67.1 percentage points from its peak of a 176.68 per cent premium.
Given its size, the trust’s has been quite volatile, and it is one of the only investment companies to find itself in both of the studies in this series.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Second is the Independent Investment Trust, which has been as low as an 11.85 per cent discount to NAV over the past five years but is currently trading at a premium of 20.36 per cent (a 32.21 percentage point difference).
The five FE Crown-rated trust is managed by Max Ward, formerly the lead manager of Scottish Mortgage before James Anderson took charge.
It is a small- and mid-cap focused trust with Fever-Tree Drinks, Blue Prism and Redrow making up its top three holdings, according to its most recent set of results in January.
Over the past five years it has been the second-best performer in the IT Global sector, returning 221.21 per cent on a total return basis and is the best performer in the sector over the past three years.
However, analysts at Numis said they would be “wary of chasing the performance of Independent IT” as it can be more volatile than its peers.
“In our view, this is the type of fund that it is best to buy when it is out of favour and trading at a discount,” they said.
Another trust that is more than 30 percentage points away from its five-year trough is Blue Planet Investment Trust.
The global portfolio sits in the IT Global Equity Income sector but invests in both equities and bonds, with 24.7 per cent currently held in government bonds.
The £21m trust has averaged a discount of 22.45 per cent to NAV over the past five years and fell as wide as 33.58 per cent but is currently on a discount of just 1.46 per cent.
The largest trust on the list by quite some margin is the five FE Crown-rated Monks Investment Trust which has been run by Charles Plowden, Malcolm MacColl and FE Alpha Manager Spencer Adair since 2015.
Over this time the portfolio has returned 104.61 per cent, the fifth-highest in the IT Global sector, as the below chart shows.
Performance of trust vs sector and benchmark since managers start
Source: FE Analytics
The trust was trading on a discount as wide as 14.75 per cent five years ago and has averaged a discount of 7.86 per cent over the period but currently trades on a 4.58 per cent premium.
“Monks’ turnaround has been one of the success stories of the Global sector over recent years,” analysts at Winterflood Investment Trusts noted recently.
“The discount has narrowed considerably since its adoption of the Global Alpha strategy in March 2015, and it has recently issued shares at a premium.”
The analysts said the re-rating has been partly driven by increased ownership by retail investors, meaning that managing the premium will be as important as the discount.
“The quid pro quo is that we would expect the fund to buy back shares, as Scottish Mortgage has done, in the event that the discount widens materially, thereby limiting downside discount risk,” they said.
Fellow Baillie Gifford trusts Edinburgh Worldwide and Pacific Horizon also crack the top 15, as the below table shows.
Also of note is the JPM Global Growth & Income trust run by Jeroen Huysinga and Timothy Woodhouse.
In November 2016 shareholders approved changes to the fund’s distribution policy so that a target dividend equivalent to at least 4 per cent of the NAV, as at the end of the preceding financial year, will be set each year.
This compares with the underlying portfolio yield of approximately 1.8 per cent with the remainder financed through a combination of available net income in each financial year and other reserves, including capita. However, the investment approach is unchanged, remaining focused on growth.
The move has seen the trust’s share come in from an 8.27 per cent discount at the time to a 1.85 per cent premium currently.
Table of top 15 trusts climbing highest from their trough
Source: AIC
Manchester & London, Ashmore Global Opportunities, Rights & Issues, Athelney Trust and Chelverton UK Dividend Trust round out the top 15.