Shop around: Investment trusts lend themselves to bargain-spotting because of their unique structure
Investors have had a torrid year so far, with stock markets tumbling around the world. Rising inflation, Russia’s invasion of Ukraine and Covid lockdowns in China have made investors jumpy and caused huge volatility in share prices.
But not all investments hit by stock market sell-offs deserve to have fallen by so much. Some are as robust as they were at the start of the year, but have simply been caught up in the market gloom. Identify these companies or funds, and you’ve got yourself a bargain.
Investment trusts lend themselves to bargain-spotting because of their unique structure.
They are companies listed on the stock exchange which aim to make money by investing in other companies. As a result, there are two ways of measuring the value of an investment trust. One is by looking at the total value of its shares and the other is looking at the total value of its underlying holdings. The two numbers can become divorced.
If the value of the shares lifts higher than the value of the trust’s holdings, the investment trust’s shares are said to be trading at a premium. If the shares are worth less than the underlying holdings, they trade at a discount.
Discounts can be where bargains lie for smart investors. They can indicate that investors have lost confidence in an investment trust, its style or outlook when actually the underlying holdings remain robust. Buying at a discount can offer investors the opportunity to buy a basket of perfectly good companies at a bargain price.
Annabel Brodie-Smith, at the Association of Investment Companies (AIC), points out that discounts have widened in some trusts in recent years. ‘In the past, bold long-term investors have been rewarded for investing after market falls,’ she adds.
However, not all trust discounts represent good bargains – some trade on knockdown prices for a reason. For example, there could be a problem with the trust’s management, with how its valuations are calculated or the assets they invest in may be hard to buy and sell easily.
Even where there are no problems with a trust, it may take a long time before it falls back in favour once again. Investors, as always, need to be prudent and patient.
Here are five investment trusts which could offer the bargain that investors are hungry for.
1) Mercantile Investment Trust
What is it?
A £1.7billion trust run by Guy Anderson and Anthony Lynch at global investment house JPMorgan Asset Management. It focuses on businesses that are doing their best to combat rising inflation and supply chain issues. You would think this focus would make it popular with investors, but that is not the full story. The trust focuses on UK smaller and medium-sized companies which have seen a sharp sell-off this year.
Small UK companies are down in price by nine per cent so far this year, medium-sized companies by 14 per cent.
What’s in the portfolio?
Mercantile has a high proportion of holdings in technology stocks, including Softcat and Computacenter, while it also owns popular retailers Dunelm and B&M.
So what’s the discount?
You can currently get £100 worth of holdings for just £89. That is because shares are trading at £2.09, while net asset value is £2.35 per share – an 11 per cent discount.
Simon Elliott, analyst at stockbroker Winterflood, calls the discount ‘anomalous’, since it used to be just four per cent. He believes the discount could close if sentiment towards small and medium-sized UK companies improves in the coming months.
2) Herald Investment Trust
What is it?
A £1.1billion trust focused on small and medium-sized technology companies and managed by Katie Potts. Although the fund can invest in companies anywhere around the world, almost half of its portfolio is in the UK where Potts sees the most value.
The trust has a good track record. Since 1994, it has delivered more than double the gains of other trusts with a similar investment focus.
What’s in the portfolio?
Top holdings include pollster YouGov, marketing consultants NextFifteen and cybercrime fighters GBG Group
So what’s the discount?
Investors can get £100 of holdings for £80. Shares cost £18, but its assets are worth £22.58 per share – a discount of 20 per cent. To put this into context, the discount has averaged just under 12 per cent over the past 12 months.
3) Baillie Gifford Japan
What is it?
A £717million trust that invests in small and medium-sized companies in Japan. It has a good 40-year track record, but its shares are down in value by 27 per cent over the last 12 months, compared with 16 per cent on average for trusts invested in Japan.
What’s in the portfolio?
Major holdings include all the Japanese greatest corporate hits: the likes of Sony, SoftBank and ecommerce group Rakuten.
So what’s the discount?
You can get £100 worth of holdings for £98.40. That is because shares are trading at a 2.6 per cent discount, where it typically operates at a premium – as high as 9 per cent in 2017. Shares are currently priced at £7.76.
Chris Salih, investment trust research analyst at FundCalibre, believes Japanese companies have the potential to make some good returns for investors in the near future.
He says: ‘Japanese companies are used to working against a backdrop of flat consumer demand, an ageing population and where land use is at a premium.’
4) Fidelity China Special Situations
What is it?
This is the UK’s biggest China investment trust, run by Dale Nichols. The trust’s share price has been hit by renewed Covid lockdowns across China, which have made it harder for companies to operate.
These issues remain, making investing in China riskier than usual at the moment. The trust’s share price has fallen 45 per cent over the past 12 months in line with other China investment trusts. Over five years, investors have still generated a return of 32 per cent.
What’s in the portfolio?
Fidelity Special Situations holds a wide range of companies listed in Hong Kong, Shanghai and Beijing. It also invests in unlisted companies which can be risky, but it did allow Nichols to take a successful punt on e-commerce giant Alibaba before it made it to the stock market.
Large holdings include pharmaceutical business Wuxi Apptec and AI group Sensetime. Over a quarter of the fund is in consumer goods, popular with China’s emerging middle class.
So what’s the discount?
Illustrating the volatility of the situation in China the fund was trading on a discount of just below 7 per cent earlier last week, before the share price rebounded on Friday – leaving it trading at a slight premium. But it may still offer a discount opportunity in the future.
Laith Khalaf, head of investment analysis at wealth platform AJ Bell, says: ‘Fidelity China Special Situations is a good way to invest in China, although its focus on just one country and its bias towards smaller companies make it a high risk investment which is likely to generate more extreme returns than the market.’
5) Henderson Smaller Companies
What is it?
A trust that specialises in small companies – currently an out-of-favour sector. The shares are down 23 per cent in the last 12 months, while trusts in the smaller companies sector have fallen 3 per cent on average. Manager Neil Hermon is standing firm, topping up holdings in his favourites when prices fall.
What’s in the portfolio?
A mix of small companies in sectors including industrials, financials and technology. Large positions include housebuilder Bellway, asset manager Impax and tech tools manufacturer Oxford Instruments.
So what’s the discount?
Investors can get holdings worth £100 for £90. The discount is 10 per cent, compared with an average of 8 per cent over the past 12 months.
Jason Hollands, managing director of Bestinvest, believes the shares are worth ‘snapping up’.
***
Read more at DailyMail.co.uk