Where to find value in investment trusts

Investment trusts' discounts to net asset value have narrowed sharply of late, but there are still bargains out there.

Unite student accommodation buildings in Birmingham © Nick Maslen / Alamy Stock Photo
Student accommodation specialist Unite looks attractive © Alamy
(Image credit: Unite student accommodation buildings in Birmingham © Nick Maslen / Alamy Stock Photo)

As markets plummeted in mid-March, investment trusts sold off en masse. Discounts to net asset value (NAV) widened from an average of a few percentage points to double digits.

According to the Association of Investment Companies the average discount to NAV was 25% on 19 March, wider than 18% witnessed at the height of the financial crisis in late 2008.

The giant rally we have experienced in recent weeks has seen discounts narrow quickly, however. Now the mean is around 10%, still slightly above the long-term average.

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A buy for the brave

Investment trusts in general may no longer be in the bargain basement, but there are still some isolated pockets of value that I think warrant some further attention.

Let’s start with UK mid and small caps. This market segment has been hammered as the FTSE 250 has sold off aggressively over fears for the domestic economy. I’m a long-term bull on the UK domestic economy – both before (Brexit) and after the Covid-19 crisis. But I admit that you’d be a brave soul to jump back in now.

Among the worst hit trusts in recent weeks has been the JP Morgan Mid Cap (LSE: JMF), with a year- to-date (YTD) decline of 40% and an 8.5% current discount to NAV.

Another quality choice is the Montanaro UK Small Companies (LSE: MTU) fund, down by just under 30%YTD and on a 13.5% discount; Schroder UK Mid Cap (LSE: SCP) is down 37% YTD and trades at a 10% discount. If you’re patient and willing to invest for the long term, I think these could be great entry points. Nonetheless, the news on the domestic front will make for grim reading in the next few months. You’ll need to be very patient and willing to top up at lower prices.

Consider the real estate investment trust (Reit) sector too. The indiscriminate sell-off has revealed some interesting opportunities for those willing to be bold. In no particular order I’d start with Regional REIT (LSE: RGL), a regional commercial property fund featuring both office and industrial space. Clearly this fund will be in the eye of the storm in Britain and it’s no wonder that last week it slipped another 10% and is currently trading at a 30% discount to NAV.

Student accommodation providers are also feeling the pinch as universities remain closed and some students complain about paying for accommodation they can’t use. There is also the very real possibility that some universities might even go bust if foreign students stop coming to the UK. Unite (LSE: UTG) is an excellent business and its current 6% discount is a great opportunity to buy back into the sector if you think it will recover.

European offices will recover

Over on the continent I’m a big fan of Schroder European REIT (LSE: SERE), which has a portfolio of quality (mostly office) properties in key European business cities and is currently trading at a 42% discount.

The fund has lost over 35% in value this year and the yield currently stands at just under 10% – although that is assuming the tenants in the group’s properties pay their rent.

Sticking with the property sector, investors should note too that Tritax Big Box (LSE: BBOX), which owns a large portfolio of logistics centres, is currently stuck on an unprecedented 23% discount.

Keep a close eye on the Impact Healthcare Reit (LSE: IHR) too. It runs a portfolio of care homes for the elderly. It is on a discount to NAV of 16%, well above average, and it yields 6.8%.

The social-care sector is facing unprecedented challenges at present and many of its clients are struggling, but post-coronavirus we will almost certainly see significant (and necessary) investment in social care in Britain, which bodes well for this trust.

David C. Stevenson

David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire.
He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com

David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space. 

Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business. 

David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust. 

In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.