The discount to net asset value (NAV) of the share price of the average investment trust has, according to Winterflood Securities, risen from barely 1% at the start of this year to 12.5%, having exceeded 15% in October.
It might be assumed that the biggest victims would be smaller, less liquid trusts, those with poor investment performance, those with high borrowings or those with low dividend yields.
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But according to research by William Heathcoat Amory of Kepler Partners, the losers have included those with the best investment performances last year, those that have performed well this year and those with generous yields.
Cheap investment trusts to buy
Going for a song: Hipgnosis Songs Fund
Hipgnosis has been a prolific issuer of shares since its flotation in 2018, multiplying its issued capital sixfold. The proceeds, along with £600m of debt, have been used to buy catalogues of songs and their royalties. It now owns 65,000 songs and has assets of £2.5bn. With JPM Cazenove estimating a NAV of 152p, the shares at 86.5p trade at a 43% discount and yield more than 6%. The debt facility runs for five years and costs between 5.5% and 6%.
Early scepticism was justified by an unproven business model, the challenge of integrating the blizzard of acquisitions and doubts about the quality and durability of the portfolio.
But the long-term growth potential of the asset class is now clear, with 7.5% growth in revenue and 17% growth in cashflow in the fund’s latest half-year.
The portfolio valuation was flat, despite a rise in the discount rate to a chunky 8.5%, though the recovery in sterling is eating into the value of a dollar-based asset. Music streaming is projected to grow by 6.6% per annum and Hipgnosis has 22 songs, on average 6.2 years old, in Spotify’s top 100. Other sources of royalties are films, TV and advertising.
The fund’s growth makes this one of the best cheap investment trusts to buy.
Defensive income stream: Supermarket Income Reit
Supermarket Income Reit has grown through share issuance and acquisitions to assets of £1.8bn but a 21% fall in the share price has resulted in a 10% discount to NAV and a yield approaching 6%. It is invested in supermarket property let on long leases (an average of 15 years) to operators such as Tesco, Sainsbury’s and Waitrose across the UK – with inflation-linked rents. It owns 76 stores and targets returns for investors of 7%-10%, boosted by net debt equivalent to 21% of net assets.
Supermarkets are hardly likely to go out of business, so the odds of ending up with worthless land look extremely low. This surely makes this one of the best cheap investment trusts to buy.
Investing in big boxes: Tritax Big Box Reit
Tritax, notes Heathcoat Amory, has swung from a 30% premium to NAV to a 40% discount, with the shares halving between April and October. The dividend yield is now 4.8% for 2022 as a whole.
With assets of £6bn and 70 sites, it is the UK’s largest listed investor in high-quality logistics warehouses, the buildings that can be seen at the side of motorways and other major roads. T
hese are ideal distribution locations for major retailers, physical and online, and for other firms with complex logistics requirements.
Leases are long term with upwards-only, inflation-linked rents and an average unexpired lease term of 13 years. The availability of new sites for Tritax or competitors is very limited.
Renewable energy: The Renewables Infrastructure Group
With TRIG and nearly all the other independent renewable-energy generators now trading at discounts to NAV, the opportunity for further investment is severely limited.
With £3.3bn of assets, TRIG is second only in size to the Greencoat UK Wind (LSE: UKW) trust, which has £4.3bn. But it is more diversified in its energy sources and spread.
Higher corporation taxes and levies on excess profits have unnerved investors, who fear worse is to come, but inflation and a better outlook for interest rates bode well. In addition, continued investment will require higher returns, but this could be an opportunity for investors as this now looks like a great cheap investment trust to buy.
Around 60% of the portfolio is in the UK and 40% in Europe. Onshore-wind companies account for 52% of the portfolio, 33% is offshore wind and 14% solar; 92% of assets are operational and 8% are under construction. Debt is minimal, although TRIG has a £600m borrowing facility for acquisitions. TRIG’s share price is down by just 13% in recent months and its discount to NAV is 4.5% (10% and 2% for UKW) but the shares yield 5.2%.
The annualised investment return since flotation in 2013 has been 9.3%, but it reached 15% in the first half of 2022. Continued NAV and dividend progress looks inevitable, making the shares attractive – as are those of UKW, which also has a great record, on a 5% yield and 2% discount.
Property income: Primary Health Properties and Assura
These two property companies own purpose-built health centres, at least 90% of whose income comes directly or indirectly from the NHS on long-term leases, with the rest stemming from pharmacies.
Now that GPs are, at last, returning to their surgeries, these buildings have reacquired a useful function. Share prices have retreated by 25% since the summer and now stand at discounts to NAV of 10% but, as the properties are let on very long term leases, the attraction lies in the dividend yields, now 5.6%-5.8%.
The linking of underlying rents to inflation over the long term, with extremely secure payments, means that these yields are effectively index-linked, while the companies should be regarded as infrastructure firms with permanent assets, not as property companies. Their property portfolios are each valued at £2.9bn, half financed with debt, but half the debt in each case is fixed-rate with low coupons while half is at low margins over market rates.
Infrastructure champion: Pantheon Infrastructure
This trust’s shares are on a 14% discount to expected year-end NAV and the yield on next year’s promised dividend is 4.2%.
The group invests in four areas: digital infrastructure, renewables, power & utilities and logistics across developed economies, with 46% of assets in North America, 42% in Europe and 12% in the UK.
It seeks minority stakes by co-investing alongside a lead investor and has access to the resources of the global network behind the $20bn portfolio of the wider Pantheon investment group. The target is risk-adjusted returns of 8%-10%.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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