Three top investment trusts the market has overlooked

When assessing investment trusts’ holdings it is important to understand the fundamentals underpinning the net asset value (NAV), the value of the fund’s portfolio, while also keeping in mind that sentiment affects prices and determines whether the trust trades at a premium or a discount to its NAV.

Not all premiums and discounts are warranted, however. Investors can achieve powerful returns when they inspect the trust’s assets closely and come to appreciate that there is value in the portfolio mispriced or misunderstood by the wider market. Three examples can illustrate this situation.

Retail parks are a bargain

Retail property is a busted flush, right? Not so fast. Retail parks have performed well in terms of footfall and their tenants (such as Aldi, M&S Food, Halfords, Pets at Home, B&Q, Costa) have remained open as they are deemed to be essential services. Ease of parking, open spaces and low rents (less than £15 per square foot) combine to offer customers and tenants an attractive place to shop.

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That makes Ediston Property Investment Company (LSE: EPIC) worth a look. This real-estate investment trust (Reit) boasts solid rent collection and an efficient record of replacing struggling tenants with a company voluntary arrangement (CVA), whereby at least some of the debt is paid back.

Ediston’s impressive performance has underpinned a dividend, which will need to be increased from the current 4p a year in order to protect its status as a Reit. A discount to NAV of 23%, despite a bounce in the share price after vaccines were discovered, still looks excessive given the strength of the company’s management.

An undervalued turnaround specialist

AEW UK Reit (LSE: AEWU) has demonstrated an excellent asset turnaround strategy in the first five years of its life and offers a high dividend yield of 8% based on the share price at its initial public offering (IPO). Yet the shares are on a discount to NAV of 14%, which looks too high.

The management pursue a deep-value strategy when purchasing property assets that are often overlooked by institutional investors. They focus on possible alternative uses, agree new leases with new or existing tenants, and potentially sell at a substantial profit.

The most recent example was the sale of Sandford House, a government-occupied office in Solihull, for £10.5m compared with a purchase price of £5.4m. This was in addition to receiving an income yield of 9.6% during the period of ownership.

Profiting from private companies

Chrysalis Investments (LSE: CHRY) offers a concentrated portfolio of owner-managed, fast-growing private firms. It has been able to make a profitable part-sale of Transferwise, the online money-transfer service.

It has also seen one of its largest positions, e-commerce platform The Hut Group, successfully list on the London Stock Exchange, with the shares surging from their 500p listing price. Investors have been impressed by the substantial growth of its online delivery platform and several bolt-on acquisitions.

Estimates of the trust’s NAV place it above 170p. The shares currently sit on a premium at around 190p. However, given the momentum in a number of the underlying firms, such as Starling Bank and Graphcore, it looks well-deserved.

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Richard Parfect, fund manager at Momentum Global Investment Management