The relatively member-light UK Smaller Companies investment trust sector has witnessed something of a re-rating in the past 12 months on the back of the enduring equity rally. Over the period, the average discount on these investment vehicles has reduced dramatically from almost 16 per cent to some 9 per cent, as at the end of October, while the mean discount across all trusts is at an even tighter 5 per cent, according to the Association of Investment Companies (AIC).
The AIC’s UK Smaller Companies sector is a fairly crowded one. Although a closed-end structure is a sensible way to gain access to the relatively illiquid UK smaller companies space, says Mick Gilligan, head of research at Killik & Co, he believes this advantage has been outweighed in many cases by sub-scale trusts with wide bid-offer spreads and persistent discounts.
Mr Gilligan adds: “We have seen some consolidation in this sector in recent years, but the wide discounts suggest we should have more to rectify the balance between supply and demand.”
While small-cap funds are likely to provide investors with a meaningful allocation to mid cap, many of the more popular ones tend to mine the market within the Alternative Investment Market (Aim), too, in a bid to find investment gems.
There have been a number of strong players in the sector and for Mr Gilligan the one that stands out as expensive when recent performance is taken into account is Standard Life UK Smaller Companies investment trust. The Harry Nimmo-run investment trust is currently trading at a premium of 0.5 per cent, after its share price rallied by some 33 per cent in the past 12 months.
Hargreaves Lansdown head of research Mark Dampier acknowledges that the Standard Life portfolio’s performance has left it looking on the costly side, but he notes that while discounts have narrowed, there are still trusts in the sector offering investment opportunities.
BlackRock Smaller Companies is 53 per cent better in the past year, but it is still trading at a discount, albeit at lower than average 6 per cent. But there are a number of strong performers that still look cheap, relative to their peers. For example, the JPMorgan Smaller Companies trust has jumped by 56 per cent in 12 months and is trading on a discount of just more than 14 per cent, while Henderson Smaller Companies, up by 53 per cent is on a 12.6 per cent discount. In addition, the BlackRock run Throgmorton Trust is up 52 per cent and is trading on a 10 per cent discount.
Somewhat less covered in glory is Gresham House, which has limped ahead by just 0.8 per cent in the past 12 months and, as a result, is trading on a 29 per cent discount.
Looking broadly at the sector’s discounts, Mr Dampier adds: “This at least suggests that things have not got out of hand yet. During the 1990s, most smaller companies trusts were in a bear market. It is only in the past five to 10 years that they have really come into their own, where there has been quite a revival.”
A long-term winner in the area for a number of commentators is the value- orientated Aberforth Smaller Companies, which in the past year has firmed by 55 per cent, but it is trading on a 10.9 per cent discount.
Another notable trust in the sector, whose track record is not fully reflected in its discount/premium rating, is Strategic Equity Capital. The portfolio is on a 8.7 per cent discount but its share price has achieved a 52 per cent rise in the past 12 months.
Stephen Peters, investment analyst at Charles Stanley, says: “Strategic Equity Capital is a truly small-cap fund that is also has a very activist style, but it can be quite illiquid.” While the best performing trusts in the past few years have been those with a growth strategy such as BlackRock Smaller Companies and the Standard Life trust, Mr Peters notes that he has seen a rotation of growth into value in the past 18 months or so.
He says: “It seems more and more investment trust managers have shown a willingness to invest in companies where perhaps the earnings growth has yet to be priced in, and where there is a willingness to take on a little more risk.
“We like BlackRock Smaller Companies and Aberforth Smaller Companies, two of the biggest and most liquid in the sector, and dividends and dividend growth are very important to the latter. But the Smaller Companies sector looks expensive overall, compared to where it has been over the past year.”
INVESTMENT TRUSTS
THE PICKS
Standard Life UK Smaller Companies investment trust
Managed by Harry Nimmo, the trust is currently trading at a premium of 0.5 per cent, after its share price rallied by some 33 per cent in the past 12 months.
BlackRock Smaller Companies investment trust
This is still trading at a discount of a lower than average 6 per cent in spite of rallying 53 per cent in the past 12 months.
JPMorgan Smaller Companies Investment Trust
This has jumped by 56 per cent in 12 months and is trading on a discount of just more than 14 per cent.
Henderson Smaller Companies Investment Trust
This is up by 53 per cent is on a 12.6 per cent discount.
