November was a good month for the interest rate sensitive sectors with private equity, property and infrastructure all bouncing back from their recent lows. Many of the investment trusts operating in these areas experienced strong share price returns that were boosted by a narrowing of the discounts.
The rebound was triggered by the fall in gilt yields with the 10-year declining by 34 basis points to finish at 4.18%. This was due to better than expected inflation data in the UK and the US that enabled both the Bank of England and the Federal Reserve to keep interest rates unchanged, fuelling speculation that the next move could be down.
A scenario like this would be beneficial for most risk assets, although it is interesting to note that investment trusts comfortably outperformed the market as a whole. Their 7.1% average total return was well ahead of the three percent increase in the FTSE All-Share.
The forward markets are now pricing in accumulated cuts of almost 150 basis points next year from the Federal Reserve and similar from the European Central Bank. It is possible that they may have got ahead of themselves, but if interest rates really have peaked, then the performance in November shows the potential value on offer once confidence returns.
Private Equity
The majority of private equity trusts saw positive returns in November, but the two standout performers were the Schiehallion Fund (LON: MNTN) that was up 52.2% and Chrysalis Investments (LON: CHRY) with a gain of 24.5%. This was partly due to the fact that both of them also announced corporate actions during the month.
MNTN has initiated a $20m share buyback programme to tackle the wide discount, while CHRY has made a whole raft of strategic changes to improve investor returns. The broker Winterflood says that these developments show the benefits of an independent board acting in line with the best interests of shareholders.
They have two recommendations in the sector, with the first being the HG Capital Trust (LON: HGT) that is trading on a 21% discount and yielding 3.2%. The other is abrdn Private Equity Opportunities (LON: APEO), which is available 42% below NAV and pays a three percent income.
Property
Property investment trusts had an excellent November with the UK Commercial sub-sector up 6.5%, while UK Logistics gained 11%, which was the strongest return since the peer group’s inception in January 2014. Most of the funds operating in this area had a positive month, although 21 out of the 31 are still down over the first 11 months of the year.
Winterflood have four recommendations in the sector including the LXI REIT (LON: LXI) and Schroder Real Estate (LON: SREI) that are both classed as UK Commercial trusts. These are available on discounts of 14.9% and 31% respectively, with yields of 5.5% and 7.4%.
They also like Tritax Eurobox (LON: EBOX), which operates in Europe and is trading on a 29.9% discount with a yield of 5.9%. Their other recommendation is TR Property (LON: TRY) that invests in property shares and is available 9.5% below NAV and pays an income of five percent.
Infrastructure
It was also a good month for the infrastructure and renewable energy trusts with average share price total returns of 10.2% and 9.7% respectively. Out of the 34 funds, 29 were in positive territory, with the top performer being Gresham House Energy Storage (LON: GRID) with a gain of 28.5%.
It is one of Winterflood’s recommendations in the sector, but even after the rebound it is still available on a 27% discount and a yield of 6.5%. The other one they are backing is the social infrastructure trust BBGI Global Infrastructure (LON: BBGI) with its discount of 12% and income of 6.1%.
In the renewable energy space they like JLEN Environmental Assets (LON: JLEN) that is available on a 20% discount and a yield of 7.8%. The other option is Cordiant Digital Infrastructure (LON: CORD) that is trading on a 35% discount and paying 5.5%.