At MoneyWeek we’ve always believed investment trusts are one of the London market’s best-kept secrets. Trusts are closed-ended active investment funds. With a fixed number of shares in issue, trusts trade like traditional stocks and shares, but they invest like funds.
They are essentially investment companies, and they have other unique advantages as well. They can borrow money to boost returns, usually through fixed-rate debt such as bonds and debentures, and their closed-ended nature means they’re well-suited to buying and holding illiquid assets (where the returns can be enhanced with low-cost debt).
Due to their closed-ended structure, investment trust shares trade with supply and demand, which can result in these companies trading at a discount or premium to the value of their underlying portfolio net asset value (NAV). This can be a great opportunity for investors to snap up £1 of assets for 90p or less.
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And while investors should never buy a trust for its discount alone, trust discounts today stand at their widest since the financial crisis.
Investment trust discounts grow
Over the past year, investment trust discounts across the sector have widened from 8% to 16% to “levels not seen since the global financial crisis of 2008 and 2009” according to Peter Hewitt, the fund manager of CT Global Managed Portfolio Trust.
The CT Global Managed Portfolio Trust is one of the handful of investment trusts specialising in buying other trusts, aiming to capitalise on the gap between market values and NAVs. Two other funds are AVI Global, the largest with a market capitalisation of over £1bn and MIGO Opportunities. AVI, the management group behind AVI Global, recently took over the management of MIGO’s investment portfolio.
We added AVI Global to the MoneyWeek portfolio of investment trusts earlier this year off the back of the company’s exposure to Japan and solid track record of finding undervalued trusts and other holding companies.
Both AVI and CT are trading at discounts to NAV, suggesting investors can buy the underlying assets at a double discount. With discounts now at levels not seen since the financial crisis, now could be the time to do just that.
The outlook for UK trusts
All UK equities are suffering from something of an overhang of bad news. While this may continue, Hewitt believes UK equities are “discounting the most pessimistic of outcomes,” suggesting there’s “significant opportunity for positive returns from UK equities” if there’s even a modest improvement.
CT’s portfolio has more UK exposure than AVI’s suggesting it’s one of the best options for investors looking to capitalise on this UK-specific trend.
It’s also one of the few trusts that continues to have both Income and Growth shares. The portfolio is split between income holdings and growth investments (to match the share classes) with the likes of The Schienhallion Fund and TR Property featuring on the growth side, with Digital 9 Infrastructure and other income plays making up the income portfolio.
Digital 9 is a great example of the sort of value on offer for investment trust investors today. The trust is trading at a mid-40s% discount to NAV. Its portfolio is made up of digital infrastructure assets, such as data centres and wireless internet networks.
However, the trust has relied heavily on equity issuance to fund growth in recent years, and when it moved to a discount to NAV, this avenue shut, “the market began to be concerned over levels of gearing that would be needed to fund future growth,” notes Hewitt in CT’s latest investor update. Management is now working on a strategy to push the business forward, “and if successful, there is considerable upside.”
As well as these options, CT is also looking to add new holdings to the portfolio when opportunities arise. A key theme the fund managers have been increasing exposure to in both the income and growth portfolio is undervalued UK small caps. It has added a holding in Aberfoth Smaller Companies Trust, which was trading at a 13% discount to NAV, and is opportunistically boosting holdings in other trusts.
By offering both Income and Growth shares, CT offers something for both income and growth investors. The Income shares are currently yielding nearly 6%, which is an attractive level of income, but for those inventors who’d rather buy into growth (and may have tax considerations) the Growth shares don’t distribute income.
Since inception in mid-April 2008, the Growth shares have returned 5.8% per annum compared to 6.1% compounded for the Income share class.
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