Investment trusts have had a torrid time over the past year, with share prices moving from premiums to net asset value (NAV) to wide discounts. The derating has stemmed from rising bond yields and increased competition from asset classes such as public debt, which until the advent of monetary tightening offered meagre returns.
Moreover, misleading guidelines from the Financial Conduct Authority, the City regulator, on reporting layered fees has created a buyers’ strike by traditional institutions. As a result, the investment-trust sector now offers compelling value and attractive income streams covered by sustainable and growing earnings.
A juicy yield attracting insiders
Greencoat UK Wind (LSE: UKW) is now a major part of the UK power-generation supply through its 49 UK onshore and offshore wind farms. It originally listed on the stockmarket over ten years ago and has grown through subsequent equity raises and by reinvesting surplus cash generation into further wind farms.
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Wind strength and frequency have fallen below modelled expectations in seven of the last ten years. But this has not prevented the group from delivering dividend growth linked to the retail price index. On average, dividends have been twice covered by cash flows, with the lowest cover in any given year being 1.3 times cash flow.
The share price is 16% below NAV, which itself has been updated to reflect the reduced valuation caused by higher bond yields; however, the adjustment was mitigated by higher inflation-linked cash flows from subsidies and power prices. The dividend yield, 6.4% and growing, has not been lost on the company’s managers, who have been buying shares.
Weathering the shocks well
Sequoia Economic Infrastructure (LSE: SEQI) holds 62 senior secured infrastructure-debt instruments, 55% of which are on floating interest rates (fully hedged to sterling across a diversified international portfolio). The investments have an average life of 3.3 years.
The group has no debt and is splitting the cash flows received from loan maturities between reinvestment into higher-yielding new loans and funding a share- buyback programme. The trust listed in 2015 and the portfolio has weathered some significant exogenous shocks well, with an observed bad-debt loss rate of 0.5% a year versus a portfolio yield to maturity of 12%. The return to shareholders from here is a growing dividend yield of 8.6% and a share price, now at 83p, that is 11% below NAV, which itself should grow. This feels like the wrong price given its record of capital discipline and moderate portfolio risks.
Ample scope for a rerating
Nowhere has the derating of trusts been more dramatic than within listed private equity, as investors question the official NAVs. In 2022 Chrysalis Investments (LSE: CHRY) suffered marked-down valuations in some of its largest positions and a halving of its NAV from its peak. However, since then we have seen two consecutive quarters of modest NAV recovery.
There is anecdotal evidence that the private-equity industry is seeing transactions being conducted at unexpectedly high valuations. With positive trading updates from its larger investments in Starling, Wefox, Brandtech and even Klarna, it is arguably time to view the 48% discount to NAV as being too negative.
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