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Why are investment trust discounts narrowing?


Investment company discounts are approaching multi-year lows, according to Sarah Godfrey, an investment trust analyst with Edison Group. Data from Morningstar is indicating that the average discount for all UK-listed investment companies, with the exception of venture capital trusts and 3i, was only 1.44% at the start of May.

Historically, the narrowest average was 0.55%, which was reached in December 2017. However, the numbers also disguise the fact that there is quite a range in variation when you look at investment trusts by sector.

For example, insurance and reinsurance strategies see an average discount of 44.6% which reflects some poor years for the insurance sector overall, plagued as they have been by a series of natural disasters. Trusts which invest in the renewable energy sector have a premium of 14.6% and an average yield of around 5%.

Which are the popular investment trusts?

Renewable energy infrastructure saw the highest levels of additional capital raising in the first half of this year, reflecting the popularity of the sector. A dozen sectors saw a discount which was narrower than the average, among them four debt sectors, including direct lending and property debt. However some equity sectors are also seeing interest, including global equity and Japanese equities.

The observations from Edison reflect the fact that there is quite a high level of divergence in the discount or premium among investment trusts. One of the driving forces may be the hunt for yield, with those sectors that have funds which pay a higher yield more popular among investors. These help to smooth out returns, but in addition there is the issue of where do you get your income from otherwise? Cash?

For example, trusts in the global equity income space pay an average dividend yield of 3.9% which compares very favourably with government bonds.

It is obvious the investment trust buyers are avoiding the UK at the moment, due to the uncertainty around Brexit.

Good investment trusts like the Henderson Opportunities Trust, are still trading at high discounts. They are unloved, and will remain unloved until Brexit is resolved. Asian and emerging markets are also tending to trade at higher discounts, largely because they are still viewed as higher risk.

Where to buy investment trusts

Investors can buy UK listed investment trusts from a stock broker, direct from the fund manager or on an online investment platform. Because they are listed companies, they can be bought and sold just like normal shares.

Smaller investors may benefit from going through a stock broker, which can aggregate all the deals from a larger number of small investors. However, this also has the disadvantage that the investor’s name does not appear on the shareholder register, as your broker is trading via a nominee account.

It is also possible to open a dealing account with CREST, but this can incur additional fees, and such accounts are not supported by all stock brokers.

Investment trusts covered recently by The Armchair Trader

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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