Whenever considering buying investment trusts, it’s important to consider whether it is trading at a discount or a premium.
In recent years, average investment trust discounts have reached record levels when compared to net asset value (NAV), of around 18%. These discounts narrowed slightly in the aftermath of Labour’s election win, but the latest data from the Association of Investment Companies shows that in October 2024 the average investment trust discount was still -14.8%, one of the widest average discounts since the financial crash.
This presents opportunities for investors considering buying an investment trust. While some investment trusts trade at a steep discount for a good reason, discounts often represent an opportunity to invest in a top fund at a discounted valuation.
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“Savvy investors can find bargains in the investment trust market,” says Myron Jobson, senior personal finance analyst at interactive investor. “Many investment trusts are currently trading at significant discounts to their NAV.”
He adds that this reflects “a measure of pessimism” around investment trusts. Over the long term, though, he says that investment trusts tend to recover towards their NAV if they trade at a discount for a period.
This, he says, potentially offers a “double benefit: an uptick in the trust’s underlying assets, but also the reduction in the discount”.
However, Max King, former fund manager and MoneyWeek columnist, advises caution when it comes to discounted investment trusts.
"Very wide discounts can either represent a bargain or a sign that the investment thesis is in trouble," he says. While the issues of any individual trust will generally be public knowledge, "buying individual trusts on wide discounts is a dangerous game, usually best left to the professionals such as MIGO and AGT.
"If you hold a trust for the long term, I.E. over 10 years, the performance contribution from any narrowing of the discount is likely to be small in relation to the investment return generated by the fund," he adds.
Why do managed investment trusts trade at a discount?
An actively managed investment trust will have a portfolio manager adopting an active trading strategy that involves decision-making over which stocks are best included in the trust.
The way an investment trust is managed is therefore highly impactful not only on its performance, but also on sentiment towards it. Investors are unlikely to buy what they regard as a poorly managed investment trust.
Actively managed investment trusts typically incur higher fees than passively managed equivalents, and as such, investors will want to be convinced that the fund manager is adding value to the performance of the fund.
When considering buying an investment trust that is trading at a discount, it is important to consider why it is doing so.
“Whether you think the discount is warranted or overblown is down to what you make of it [but] it is important not to look at the discount in isolation,” says Jobson. “Assess the trust’s bargain credentials by comparing its current discount with its longer-term average - such as the past 12 months. If the discount is greater than the trust’s 12-month average, it could arguably be a good entry point.”
Three investment trusts currently trading at a discount
Alex Watts, fund analyst at interactive investor, has identified three investment trusts that are currently significantly discounted to their NAV.
1. Fidelity Special Values (LSE:FSV)
Discount to NAV: -8.97%
Fidelity’s Special Values fund adopts a contrarian approach to identifying value companies. The investment trust manager, Wright and Winton, have deep experience in UK small- and mid-cap businesses, according to Watts, which is reflected in the fund’s holdings.
“They take a bottom-up approach to identifying business with unrealised value with potential to recover and have proven capable of outperforming the benchmark All-Share and peers over various time periods,” says Watts.
The trust suffered during the first half of 2022 as a result of its small- and mid-cap bias, but is now recovering well.
Watts think that the deep discount at which it is now trading is unwarranted. “While discounts on UK equity investment trusts are far from uncommon now, the current discount to NAV for FSV is perplexing,” he says.
“FSV is a popular and sizable trust that not uncommonly trades near to, or above NAV.”
2. Pacific Assets (LSE:PAC)
Discount to NAV: -12.04%
This trust takes a long term approach to investing in sustainable Asian businesses.
“The focus is on selecting quality businesses with high standards of management and durable business models,” explains Watts.
This has led the fund to be overweight India, at 41% of the portfolio compared to 21% of the benchmark index, and underweight China, which comprises 9% of the trust but 31% of the benchmark.
Being underexposed to China meant that the fund missed out, relative to peers, when the country’s economy rebounded earlier this year. However, its relatively defensive and quality-focused approach has, according to Watts, given it resilience during periods of emerging market weakness.
“The current discount of just over -12% is uncommon for the trust when compared with the last 10-year average discount of around -5%,” he says.
3. TR Property Trust (LSE:TRY)
Discount to NAV: -9.94%
The TR Property trust offers broad and diverse exposure to the UK and European commercial property sector, with approximately a third allocated to the UK and two thirds allocated to Europe.
“The trust yields over 5%, far surpassing its benchmark, and has an impressive record of growing distributions year-on-year,” says Watts. While its returns over the past three years are negative as a result of the property sector’s challenges during 2022, its “long term track record is stellar, returning around 2% and 3% in excess of its benchmark over 10 and 15 years”.
In general, real estate investment trusts (REITs) can be a sensible, liquid means of investing in the property market.
Overall, King recommends that "investors should buy well-managed trusts with a good record and outlook and regard any discount as a bonus", rather than buying discounted trusts for the sake of their being discounted.
If you are looking for a ready-made global, all-weather portfolio of investment trusts that you can set and forget, consider MoneyWeek’s investment trust portfolio.
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