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Investment trusts offering investors bargain basement opportunities

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Since the beginning of the year the discount of the average investment trust has widened more than 10 percentage points – from 3.6% on 31 December 2021 to 14.3% on 18 November 2022. Almost all investment company sectors on a discount.

Out of 38 sectors, only the Hedge Funds sector trades at a premium, of 3.8%. The sector is one of this year’s best-performing, with several of its constituents delivering for investors in turbulent times. We flagged this opportunity up for our readers back in September.

The most deeply discounted equity sector is North America, on a 26.5% discount, followed by India on a 14.9% discount and Global Emerging Markets on 12.4%.

Discounts for alternatives sectors can be misleading, as they are based on current share prices and the most recently reported net asset values, which can be out of date. However, as it stands the most deeply discounted alternatives sector is Growth Capital on a 43.4% discount, followed by Property – Europe on 42.8%.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Discounts are currently wider than usual and this can present buying opportunities. However, investors need to consider whether an investment company’s strategy meets their objectives. They also need to take into account other factors such as the investment company’s performance record, charges and gearing. If investors are in any doubt, they should speak to a financial adviser.”

Discount moves in 2022

Among equity sectors, the biggest discount changes in 2022 have been in the Biotechnology & Healthcare and Technology & Media sectors, where discounts have widened by 9.2 and 8.5 percentage points respectively.

The alternatives sectors that have seen the biggest widening of their discounts are Property – UK Logistics (47.0 percentage points) and Property – Europe (42.2 percentage points).

Do these discounts offer value?

Anthony Leatham, Head of Investment Companies Research at Peel Hunt, said: “These are volatile times and the discount picture is evolving on a week-by-week basis. Whilst it feels like a ‘marmite’ choice at the moment, China cannot be ignored. We would highlight Fidelity China Special Situations trading on an 11% discount.”

Leatham says a recent update from the manager – Dale Nicholls – points to some of the cheapest valuations across the underlying portfolio companies that he has seen in a long time. Investors are looking for a shift in policy focus to support growth and any positive action could act as a catalyst for a re-rating.”


Myrto Charamis, Co-Head of Investment Companies at Berenberg, said: “I think there are many opportunities within the alternatives investment companies for investors to scoop up high quality strategies at very attractive valuations,” said Myrto Charamis, Co-Head of Investment Companies at Berenberg. “For investors who are mainly looking for long-term capital appreciation I believe listed private equity is very cheap trading at an average discount to NAV of 30%. The sector, in my view, provides a lot of headroom for investors who believe valuations are too high.”

For investors who are mainly looking for yield, there are also a few great opportunities within the debt and renewables sectors which can compete with the current corporate debt yields. Charamis likes BioPharma Credit, which is trading at an 8% discount to NAV with a yield of 7.3%. It provides investors with predictable and uncorrelated returns through its unique strategy of investing in debt assets (primarily senior secured and royalty) in the life sciences industry.

He also likes Real Estate Credit Investments which is trading at a 9% discount with a yield of about 9%. It aims to deliver a stable quarterly dividend with minimal volatility, across economic and credit cycles by originating and investing in real estate debt secured by commercial or residential properties in Western Europe, focusing primarily on the UK, France and Germany.

In the renewables sector Charamis flags up Harmony Energy Income Trust which he thinks is the best opportunity with a yield of 7.2% trading at a 4% discount to NAV. It targets a 10% NAV total return, unlevered, by providing investors with unique exposure to two-hour duration grid scale battery energy storage systems in Great Britain which support the resiliency and flexibility of the energy system as the penetration of intermittent renewables increases.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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