Now could be a good time to bag an investment bargain

Chancellor Rishi Sunak: keen to alleviate the pain © Alamy

published 16 March 2020

Regular readers will know that we’re big fans of investment trusts here at MoneyWeek. One aspect of trusts that we like seems particularly relevant this week – the fact that you can sometimes pick them up at a discount to the net asset value (NAV) of their underlying portfolio. That’s because, unlike open-ended funds, investment trusts are listed and so the value of their shares trades independently of the value of the assets they own. As a result of this, when there’s a big panic in the markets (as there has been this week) it’s quite feasible that the share price of the trust will be hit alongside the value of its portfolio. So not only are you getting the underlying assets more cheaply than before, you’re also then getting an added discount on top.

Of course, panic is (surprisingly often) quite rational. The coronavirus means that we are facing an unknown but potentially brutal economic shock. That said, given the emergency moves taken by the Bank of England (see page 8) and also by the chancellor in the budget (see page 12), it’s clear that the government will throw everything it can at the problem to alleviate the economic pain. On top of that, the UK market was not exactly expensive going into this plunge. At its lowest point the FTSE All Share traded on a dividend yield of around 4.8% – not far off the 5.6%-ish level at which it peaked during both of the last recessions. It’s still on around 4.4% – so while you might not pick the bottom, it’s hard to argue that stocks are in any way overvalued.

So what investment trusts look appealing to those who feel that markets might be pricing in the worst? As of Wednesday morning at least, River & Mercantile UK Micro Cap (LSE: RMMC) was trading at a discount of around 20%, compared with a 12-month average of around 15%. If you don’t want to go that far down in terms of company size, try BlackRock Throgmorton (LSE: THRG), now trading at a small discount rather than a premium, or JP Morgan Smaller Companies Investment Trust (LSE: JMI) on a discount of around 12%.

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Beyond the UK, the plunge has also created a chance to get in on some highly rated trusts – RIT Capital Partners (LSE: RCP) now trades at slightly below NAV (compared with a 12-month average premium of over 8%), while highly respected private equity trust 3i (LSE: III), which has traded on an average premium of near-30% over the past year, is now trading at just above NAV. Meanwhile, if you’re still nervy, then as David Stevenson notes on page 27, stocking up on defensive trusts such as Personal Assets (LSE: PNL), which have so far done pretty much exactly what they are meant to do – protect investors’ capital in a downturn – may help.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.