The share price of the average investment trust in 2022 was trading at a 13 per cent discount to the underlying net asset value, according to investment bank Numis.
This level has not been seen on a consistent basis since the global financial crisis, with discounts only briefly trending lower during the start of the pandemic.
Although this can produce opportunities, share price is only one part of a number of factors that determine how an investment trust performs.
Big movers
The investment trusts which saw their discount widen the most in 2022 were tech and growth investors, the beneficiaries of the past decade of ultra-low interest rates.
The Augmentum Fintech trust, which invests in technology and media, saw its share price flip from a 11.54 per cent premium to a 28.87 per cent discount between December 2021 and December 2022, according to the Association for Investment Companies.
The Augmentum trust also invests in private equity, meaning some of the change in share price to net asset value may be down to “valuation lag”.
Trusts that invest in private companies are not able to value their underlying holdings each day, therefore they can see a three to four month lag in valuation reporting.
This lag can be heightened by volatile markets, such as those seen in the past few years, as company valuations move quicker than the trusts’ ability to update their Nav.
Top five biggest negative movers in 2022
Discount/premium 31/12/21 | Discount/premium 09/12/22 | |
Augmentum Fintech | 11.54 | -28.87 |
Chelverton Growth Trust | -21.26 | -47.32 |
RTW Venture | 4.09 | -20.00 |
Baker Steel Resources | -23.78 | -43.43 |
Castelnau Group | 12.77 | -4.56 |
Source: AIC
A big discount to net asset value implies investors do not think the present value of the trust’s holdings will be maintained in future.
Discounts to investment trusts have narrowed over the past few years as demand among retail inventors rose, particularly for growth strategies, with many believing this trend would continue.
However, the cyclical market movement away from growth stocks, much of which was driving the demand for trusts in the past year, led to discounts widening.
Long-term discount history of investment trusts
Source: Numis
Nick Britton, head of intermediary communications at the AIC, said it was important to understand the reason for a discount.
“[A discount] can result from negative market sentiment, which we might expect to reverse in time, but it can also result from the valuations of underlying assets being out of date.
It is important to look under the bonnet of an investment companyNick Britton“This is particularly relevant when we’re dealing with investment companies that invest in private companies, which are not valued on a daily basis.”
In those cases, he added, it is key for investors to look at how the underlying assets are performing.
“Analysts often come up with their own estimates for the net asset value of an investment company, allowing them to judge whether current discounts offer an attractive entry point,” he said.
Top 5 biggest positive movers
Investment Trust | Discount/premium 31/12/21 | Discount/premium 09/12/22 |
JPMorgan Emerg E, ME & Africa Sec | -13.28 | 79.18 |
Athelney Trust | -27.49 | -7.44 |
Rockwood Strategic | -14.54 | -2.02 |
Golden Prospect Precious Metal | -18.68 | -6.17 |
Chelverton UK Dividend Trust | -6.83 | 4.69 |
To illustrate other forces that can impact a discount to Nav, JP Morgan’s Emerging Europe, Middle East & Africa trust swung from a 13.28 per cent discount in 2021 to a 79.18 per cent premium last year.
The trust was formerly the JP Morgan Russian Securities trust, which changed its investment objective in April 2022 to widen its holdings.
The trust’s holdings in Russian assets have been greatly written down after UK sanctions placed on Russian holdings after the outbreak of war, and the premium reflects the uncertainty over the true value of these assets.
Other changes to trusts’ share prices can reflect sector sentiment.
Equity income investment trusts have performed relatively well in the past year, sitting at a 0.9 per cent premium in December 2022, as many have a value-oriented strategy which has increased in popularity since interest rates began to be raised.
Numis highlighted how discounts can also vary by region depending sentiment, the nature of shareholder registers, discount controls and performance.
UK-focused trusts also had a more positive year, with Chelverton UK Dividend trust and Rockwood Strategic seeing positive share price to Nav swings.
How to value a trust
It is tricky for investors to weigh up the relative value of investment trusts, considering the number of factors that contribute to their performance.
Britton’s advice would be to continue to do due diligence on these vehicles.
“It is important to look under the bonnet of an investment company and try to get a sense of how the underlying assets are performing,” he said.
sally.hickey@ft.com
