2 cheap investment trusts to buy

After a mixed year for investment trusts, David Stevenson outlines two cheap investment trusts investors should consider.

As we approach the end of the year, it’s worth looking at what worked and what went wrong for listed funds – notably investment trusts – in 2022. 

Energy-focused funds and those exposed to resource-rich regions have continued to push ahead. 

Riverstone Energy (LSE: RSE), a private-equity firm that invests in unconventional oil and gas in North America, is up 53% year to date (YTD) and 13% over the last month. I wouldn’t be surprised if this continues in 2023. BlackRock Energy and Resources (LSE: BERI) and Gulf Investment Fund (LSE: GIF) also look well positioned.

BH Macro (LSE: BHMG) continued to be the standout defensive star (up 23% YTD), although it had a sluggish end to the year with share-price returns of -1% in the last three months. 

If volatility picks up in 2023 then it should be well positioned. Ecofin Global Utilities (LSE: EGL) was up 9% YTD and 5.3% over the last month. It has again proved a very sensible, defensive global equities investment trust for troubled times

The best-performing investment trusts 

Many renewables funds had a great 2022. Foresight Solar (LSE: FSFL) led the pack with a slew of peers not far behind. They had a sticky summer with talk of windfall taxes, but the last month has seen a strong rebound. 

That’s also true for battery storage funds led by Gresham House Energy Storage (LSE: GRID) and Harmony Energy Income (LSE: HEIT), which were up just under 35% and 25% respectively (I’m a non-executive director at GRID).

International equity investment trusts push ahead 

Among mainstream equity investment trusts  North American Income (LSE: NAIT) is an Abdrn vehicle that invests in equity income stocks in the US market. It yields 3.2% on a discount to net asset value (NAV) of 6.7%. Middlefield Canadian Income (LSE: MCT) applies the same income approach to the Canadian market with its heavy emphasis on energy stocks and real estate investment trusts. 

Bruce Stout at Murray International (LSE: MYI) has also proved his worth with a 20.7% return YTD and 9.2% in the last three months. After a few years where some doubted the fund’s rationale, recent conditions have shown the value of his dividend-focused defensive strategy.

2 cheap investment trusts to buy 

Digital infrastructure funds Cordiant (LSE: CORD) and Digital 9 (LSE: DGI9) had a cracking first half of 2022, but then hit the wall. They got caught up in the general infrastructure sell-off prompted by worries about rising interest rates, both had been trading at fairly eye-watering premiums and there were also specific factors at work. 

Investors started worrying about whether Cordiant would complete a big East European deal (this has now gone through). 

Digital 9 pushed through the takeover of UK broadcast infrastructure firm Arqiva with a large helping of debt and a modest equity raise, and some analysts worried about debt levels after the deal. Then just a few weeks later, its lead manager, who had been with the fund since the initial public offering (IPO), decided to leave. 

Cordiant at one point moved from a premium to NAV to a discount of over 25% (it’s now back at 14%). Digital 9 is trading at almost 20%.

I own both funds and I was buying Cordiant when its discount widened out to 25%. I’d be a buyer at Digital 9 if its discount moved above 20%. There are some headwinds – not least rising energy costs, which could hit margins – but all the drivers that once justified the premiums are still in place, notably the consistent increase in data usage and the need to upgrade digital infrastructure. 

Only a few weeks ago, a controlling stake in Vodafone’s mobile-tower mast business was snapped up in a deal involving KKR and Global Infrastructure Partners. 

Both these funds will probably now focus on bedding down their acquisitions. If they can make a go of kicking out generous cash flows, I have no doubt that they’ll be the subject of mergers and acquisitions activity once confidence returns.

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