Three investment trusts bucking the widening discount trend

There has been much talk of widening discounts on investment trusts recently, but not all have suffered this fate.

| 9 min read

Shares in investment trusts can trade at either a discount or a premium to the value of their underlying assets according to investor demand. This represents an added risk of investment trusts over funds or ETFs whose price is derived only from the value of the assets. With investment trusts, poor performance can be worsened by waning investor sentiment, and even strong underlying returns can be eroded by investor indifference. However, it can sometimes work to an investor’s advantage too. If a wide discount narrows it can enhance the returns produced by skilled management.

According to the Association of Investment Trusts, the average investment company traded at a discount of 16.9% on 31st October – the widest discount for a month-end since December 2008 when the world was in the midst of the global financial crisis. Average discounts have to be interpreted with a degree of caution. Some harder-to-sell assets are valued less frequently, creating a time lag. But it is striking nonetheless that discounts are so wide at a time of relative stability in financial markets.

I recently explored some of the reasons behind widening investment trust discounts. It’s been a perfect storm of higher inflation and interest rates, the higher cost of debt and, in some cases, greater selling pressure created by weaker sentiment towards UK assets such as infrastructure investments. There has also been some regulation around the disclosure of charges that have put off some buyers.

With many world stock markets not performing well this year nearly 60% of investment trusts have seen share price declines in 2023 to date, exacerbated in many cases by the trend of widening discounts. However, not all trusts have succumbed to this negative trend. Some have posted positive performance this year, and even seen narrowing discounts, owing to their particular characteristics or some specific actions such as share buybacks. This also highlights there may be opportunities in other trusts where wider discounts persist and there is a potential catalyst for a turnaround such as improving investor sentiment or shareholder activism.

Please note each of these investment trusts from our Preferred List represent specialist investment areas that could mean their performance can fluctuate to a greater degree than a more diversified fund or trust. They are best considered as satellite positions in a broader, higher risk investment portfolio.

Three investment trusts bucking the widening discount trend

1. Allianz Technology

The Trust is a one-stop-shop for the technology sector with the largest positions in the fund represented by well-known names, Microsoft, NVIDIA, Meta, Apple and Alphabet, as well as lesser-known tech businesses the manager believes are capable of strong growth.

Managed by a team based in San Francisco, the Trust invests worldwide with the aim of long-term capital growth ahead of the Dow Jones World Technology Index. Mike Seidenberg, Portfolio Manager, highlights that there are clear relative winners and losers to be found in the sector and beyond, stating that we are arguably living in the golden era of technology where companies become relevant or irrelevant depending on their adoption and use of technology.

The managers are not constrained by formally referencing an index, which can mean zero or minimal weights in some of the established tech companies which they don’t believe have their desired level of future growth potential. It also means they are free to express their views on smaller firms. These can lead to some periods where performance deviates from that of the broader technology sector.

Shares in the Trust are some 30% higher year to date, although that should be seen in the context of a much tougher time in 2022 as the tech sector and equities generally had a bad year – and that the past is not a reliable indicator of future returns. The Trust’ discount to NAV has been relatively stable this year in the region of 8-12%.

2. Pantheon International

Investment trusts can be more appropriate vehicles to access more esoteric, ‘illiquid’ assets that cannot be traded easily, and one such area where a number of trusts have carved out a niche is private equity – investments that aren’t traded on public markets.

Stock markets don’t have the monopoly on good investment opportunities. Some of the most innovative and appealing companies are in the hands of private holders, often founders and exclusive bands of early investors in the case of relatively new companies. Private equity trusts offer a way into this world for the average investor.

However, sentiment towards such trusts waned dramatically over the course of 2022 as investors worried that estimated values of private assets did not reflect changing conditions and not taking enough account of higher interest rates and slowing economic growth.

I previously explored this trend across private equity investment trusts, but since then things have improved a little, particularly for Pantheon where the a tender offer for shares under a reverse auction took place in October 2023. This is a variation of a share buyback where shareholders can elect to offer to sell some or all of their shares at different price levels. Shares offered at a wider discount are redeemed in full, while those offered at a tighter discount remain unsold. This process had the desired effect of closing the discount on the shares from around 40% to 35%, albeit it is arguably still pretty wide.

More buybacks are planned, and Pantheon currently leads the way in its peer group with this progressive policy. The Trust also has a very diverse portfolio of both direct and indirect investments through third party funds, having fostered strong relationships with leading global private equity managers worldwide. Investors therefore access a broad portfolio by manager, investment type, stage, geography, vintage and sector, so it remains worth considering for its widespread exposure.

3. BlackRock Frontiers

Frontier markets are countries with stock markets that are less established than those in emerging markets. They are nascent, much smaller, less accessible than emerging markets such as China or India, and have fewer companies to invest in. They will also almost certainly be higher risk countries, sometimes with increased danger of political unrest. The largest country weights in the MSCI Frontiers Index are currently Vietnam, Romania and Morocco and includes an array of others including Tunisia, Nigeria, Pakistan and Kazakhstan.

The high level of risk is enough to put off many investors even considering frontier markets. Yet that can be part of the attraction. A relative lack of interest means shares in good companies can be overlooked and might be available at prices that compensate investors well for the additional risk and large swings in values. Furthermore, frontier markets can be driven more by internal economic and political developments than global events. This means there can be low correlation with both developed and emerging markets, as well as other frontier countries, providing a source of diversification in a portfolio.

BlackRock Frontiers Investment Trust is one of the few UK vehicles that provides access to this inevitably very high-risk area, and in contrast to many emerging markets funds it has had a strong year to date with the share price up 14% at the time of writing, although past performance is not a reliable indicator of future returns. The Trust’s discount to net asset value has been in the 5-10% for much of the year and presently stands at a shade under 9%.

In terms of favoured geographies, the managers are presently keen on Indonesia, notably banks and consumer stocks, and are hopeful coming elections will provide a more favourable political backdrop. They also believe the Middle East offers a broad opportunity set and that Eastern Europe and Latin America are on a favourable path of easing inflation and potential interest rate cuts. They hold banks in both regions, noting the attractiveness of current valuations. You can hear more on emerging and frontier markets from Emily Fletcher in our video from our Fundamentals series.

Discrete annual performance of Allianz Technology, Pantheon International and BlackRock Frontiers investment trusts

Source: FE Analytics. The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable indicator of future returns. Figures are shown on a % share price total return basis, bid to bid price with net income reinvested.

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