According to data from Numis, 104 investment trusts and companies, with a combined market cap of more than £32bn, currently trade at a premium to their net asset value (NAV). The other 373, with a combined value of just above £59bn, trade at a discount to NAV.
A new observer, looking at this data alone, would be surprised by the common wisdom that there is no value in the sector at the moment.
However, approximately 290 trusts with a market cap of roughly £67bn have a ‘z’ score in excess of zero – meaning the discount is narrower (or premium higher) than its 12-month average. But more than 150 trusts with a market cap of £25bn or more are trading at a cheaper price than recent history on the same basis.
So it appears that there is value – just not as much as many would like. But discounts are not the only measure of value in closed-ended funds. Indeed, for most buyers of the sector, we believe it is the last thing that should be considered when deciding whether to buy a trust. Investors should spend a little more time and effort looking at the underlying value in the sectors in which they invest, rather than leaving the IT market to decide it for them.
In equity markets, we think there is great value in value. Funds such as British Empire, EP Global Opportunities, TR European Growth and Aberforth Smaller Companies all are relatively unloved by the sector, and each use a broadly ‘value-based’ investment approach. They underperformed peers since the start of the market rally in 2009, the market believing that dividend-paying ‘growth’ companies were the only stocks worth investing in. TR European Growth is rebuilding its track record after a difficult few years and we would expect it to do well during a rally of European smaller companies.
Artemis Alpha is a UK equity fund that has been very weak in recent years. There can be nothing more reassuring to retail investors to know that John Dodd and fellow manager Adrian Paterson have meaningful personal stakes in the trust. A large portion of the fund is invested in unlisted companies, which have not been sold or revalued upwards of late and so have dragged on returns. We think the trust today offers investors with a longer investment horizon the ideal combination of good management running a trust on a wide discount.
Elsewhere, listed private equity funds have seen discounts narrow in recent years, but, with realisations and merger and acquisition activity picking up, they offer potential for good returns.
We had a positive meeting with the chief executive of 3i recently, and in spite of the share price doubling in the past 18 months we expect value to be created from further sales. Dividends could form a large component of the total return from the company in the future, as it could from BlackRock World Mining. Commodities are an unloved sector but the trust yields approximately 4.5 per cent, and is trading on a high single figures discount to net asset value.
Returns from the sector are undoubtedly linked to global growth potential, but, for contrarian investors, the trust is, in our opinion, attractively placed.
Stephen Peters is an investment trust analyst at Charles Stanley
