Average investment trust discounts have narrowed considerably since the development of the various vaccines, but there are still some pockets of value.
Investment trust discounts are affected by a number of factors including the nature of the shareholder register, recent performance and the use of discount controls, but they can also provide a useful gauge of investor sentiment. Average discounts opened out to more than ten percent during the sell-off last March, yet the roll-out of the various vaccines have seen them tighten to five percent, which is less than the eight percent long-term average.
The broker Numis says that changes in the discount can give an indication of value opportunities and they have recently highlighted several examples from their list of recommendations for 2021. These wider than normal discounts can close quickly when sentiment towards the trust improves and provide an additional boost to the share price returns.
First on their list is RIT Capital Partners (LON: RCP), a £3.4bn global defensive trust that provides access to a diversified portfolio of different asset classes, both quoted and unquoted, mostly via hand-picked external managers. It started last year on a premium of around five percent, but is currently trading on a discount to the estimated NAV of around seven percent.
The portfolio is heavily focused on technology, domestic China and biotech and has an excellent long-term record of participating in market upside, while providing an element of downside protection. Numis believe that it suffers from a lack of disclosure compared to its peers, but the main reason it has slipped out-of-favour could be that the premium rating made it vulnerable to the sell-off and it wasn’t able to protect its capital during the pandemic as well as investors had hoped.
On the face of it the 23% discount available on the £1.5bn Caledonia Investments (LON: CLDN) looks even better value, although the shares consistently trade at 15% to 20% less than their NAV. Numis point out that the managers are conservative in their approach to valuations and that there is the potential for uplifts in the funds held in the portfolio that account for the majority of the assets.
Attractive relative to their peers
It is much harder to understand why the £3.1bn Polar Capital Technology (LON: PCT) should be trading on a seven percent discount given the strong performance of tech in recent years. Numis think that it is because it has been overshadowed by its closest peer, Allianz Technology (LON: ATT) that is valued close to NAV, yet PCT has an excellent track record and the discount provides an attractive entry point.
Another investment trust that looks cheap relative to its peers is the £2.3bn Templeton Emerging Markets (LON: TEM) that is available on a 12% discount. The emerging markets are widely tipped to do well this year given the weak outlook for the dollar, with many of the other trusts in the region trading on much tighter discounts.
Attractive absolute and relative discounts like these can offer a decent entry level if you are looking to increase exposure to a particular area. If sentiment improves they can provide an additional boost to the share price total return and if it doesn’t they can potentially reduce the downside risk.