4 cheap investment trusts to buy and 3 to avoid
Valuing funds that hold unlisted assets can be tricky, but some discounts look excessive.
Funds investing in private assets such as infrastructure, private equity and venture capital can be tricky to value.
Many investors focus on the methodology: whether assets are internally valued, use market reference points or are held at cost. But they should also keep an eye on how valuations change over time, and how market moves affect them.
Sometimes a huge discount simply means that the market does not believe private assets are worth what the accounts claim. But that process can work in both directions.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The A380 puzzle
Take listed aircraft-leasing funds such as Doric Nimrod Air One (LSE: DNA) and Amedeo Air Four (LSE: AA4). Their main investments were in giant Airbus A380 planes, which Airbus stopped making in 2021. So they own assets that could be worthless, or could still be valuable to some airlines (Emirates, for instance, still seems to love them).
In July, DNA announced it had sold its A380 back to Emirates for about $30m. Cue a big share price increase. Then a few weeks ago, activist investor Elliott Management showed up on the share register of DNA Two and DNA Three. Last week, it bought into AA4, which also owns some other models and leases to Thai Air as well as Emirates.
This looks like a play to get all the planes sold to Emirates at above current net asset value (NAV). But how can you value an asset when the only secondary transaction you can point to involves the largest single owner of the asset trying to negotiate a deal for the rest of its holdings? The NAVs are almost pointless in the absence of real market intelligence.
PE is close to a trough
Private equity (PE) valuations are a bit clearer. Many big players declare their portfolio valuations regularly. Everybody expects valuations to decline, but trust discounts to NAV of 40%-50% imply dramatic haircuts.
So far, this hasn’t been the case. PE managers can generally use numbers from the last funding round to calculate valuations, “albeit with ongoing assessments needed to demonstrate they remain appropriate, meaning these valuations could continue to be used for a year”, says Matt Hose, investment analyst at Jefferies. So valuations may not have bottomed out.
Still, PE funds can point to robust corporate earnings from their portfolios, and there are plenty of deals where valuations are looking fairly steady. I estimate we’ll see a 5%-15% haircut, but the discounts on funds such as Oakley Capital (LSE: OCI), Harbourvest (LSE: HVPE) and Pantheon (LSE: PANR) are probably near trough levels.
VC has further to fall
Valuation questions are most pointed in the world of listed venture capital (VC). To be fair, there are still plenty of private early-stage deals showing uplifts. Synthetic biology company Solugen – held by the Schiehallion Fund (LSE: MNTN) – has just announced an increase in valuation from $1.8bn to $2bn. Space-technology trust Seraphim has also bucked the market: its portfolio NAV rose by 1.9% from July 2021 to 30 June 2022, and valuation increases were mostly in the private business portfolio – 88% of the total value.
However, these look like the exception to the rule. Plenty of other deals are probably overpriced. European VC Molten Ventures (LSE: GROW) put out a trading update suggesting that reported NAV per share is expected to drop by as much as 12% to 830p for the six months ending September, from 937p in March. Yet discounts for listed VC funds are running at 40%-60%, which would suggest investors expect bigger cuts.
The market is right to be cautious. The tech-heavy Nasdaq index is down 30% this year. If public small- and mid-cap tech stocks are suffering such huge markdowns, then early-stage investors should perhaps expect 60%-90%.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
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.
-
How to boost your pension by £33,000 by paying it an annual Christmas bonus
Contributing an extra £400 into your pension pot this festive period will give the gift of compound interest and should make your retirement feel more jolly and bright
By Ruth Emery Published
-
Japan’s medium-sized stocks provide shelter from trade wars
Nicholas Price, portfolio manager of Fidelity Japan Trust, tells us where to invest in Japan
By Nicholas Price Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated