Investment trust broker Westhouse Securities has said the sudden drop in the price of shares of UK smaller company investment trusts may present an opportunity for investors.
The broker said the “significant de-rating” of a number of trusts in the UK smaller companies space meant some had seen their shares once again trading on “double-digit discounts”.
This means investors buying shares in the trust are purchasing them at a discount to its net asset value (NAV).
The FTSE Small Cap index has delivered 22.9 per cent in the past year, far outstripping the FTSE 100 index’s 9.4 per cent, according to data from FE Analytics.
It is this – and the stellar performance of the FTSE 250 index of mid-sized companies – which has propelled trusts that focus lower down the market-cap spectrum to outperform.
Paul Locke, analyst at Westhouse, said he had warned in a note in November that in spite of the UK economic recovery being in its early stages, smaller company trusts had “already moved to a position of being relatively expensive on a historical basis”.
He said in recent weeks there had “perhaps unsurprisingly” been a large de-rating, meaning last week more than half the trusts in this sector stood at a discount to their 12-month average rating, while others, such as the largest smaller companies trust by market cap, Aberforth Smaller Companies, had moved “strongly away from their pricing peaks”.
“Of course, recent movement in discounts reflects both natural profit-taking and the sheer pace of previous discount compression,” he said.
“It was only natural that some slippage in ratings could occur. But the question for investors now, particularly as the impact of the new tax year comes into play is, does this represent the end of the smaller companies rally or a new opportunity?
“With the UK and global economies still showing signs of accelerated growth, a likely further improvement in merger and acquisition activity, and significant amounts of capital still entering the equity market, the suggestion is that this reversal in smaller company discount pricing provides a further opportunity to once more accumulate ‘cheap’ assets on a selective basis.”
Mr Locke said the broker favoured trusts including BlackRock’s Throgmorton trust, run by Mike Prentis and Richard Plackett.
The analyst also strongly rated the Strategic Equity Capital (SEC) trust, whose shares are at an 11.1 per cent discount to NAV.
