10 experts name their top investment trust bargain

Discounts are wide across the investment trust universe, giving investors plenty of bargain-hunting potential.

The average discount across 288 investment trusts that publish net asset values (NAVs) was -17.7% at the end of May, compared to -5% across 241 trusts five years ago, according to an analysis by IpsoFacto Investor.

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The renewable energy infrastructure sector slightly distorts the picture. The sector has 21 trusts on an average discount of -32.2%. In 2019, its five trusts had an average premium of 12.8%.

“Even so, the only sector currently showing much in the way of premia are bond funds with floating rate exposures that have allowed yields to rise,” says IpsoFacto director David Liddell.

Liddell adds: “Good old stalwarts like global equity income and UK equity income are on average discounts of -10.3% and -7.1% respectively, compared to -0.3% and -4.7% five years ago. Rarely, if at all in the past, have there been so many attractive discounts across so many sectors.”

The price paid for an investment is clearly crucial to its future performance. If “buy low, sell high” is the ultimate investment mantra, looking for cheap entry points seems a winning strategy.

James Sullivan, head of partnerships at Tyndall Investment Management, makes the observation: “One can make money buying the worst house on the street at the right price, and one can lose money buying the best house on the street at the wrong price. Investing is not a beauty parade; it’s an unemotional pursuit of returns.”

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But with so many bargains around, which are the most attractive? We asked 10 investment experts to name their top investment trust bargain pick. All discount data below is to 11 June 2024.

Murray Income

For Liddell at IpsoFacto, standout bargains can be “Steady Eddies” that are just too cheap. He believes Murray Income Trust Ord (LSE:MUT) falls into this category. Its -10.9% discount is above the UK equity income sector average.

“It has a good record of dividend rises and should yield at least 4.4% going forward,” says Liddell.

A catalyst for the discount to narrow should come from a general re-rating of UK shares. “British stocks represent a golden buying opportunity according to HSBC and the expected fall in interest rates will limit the competing attractions of cash and gilts as places to park money for income,” he adds.

Fidelity Special Values

Canaccord Genuity Wealth Management reckons Fidelity Special Values (LSE:FSV) in the UK All Companies sector offers a triple or even quadruple discount.

Head of fund selection Kamal Warraich says: “UK equities remain unusually cheap compared with global equities, value remains cheap compared with growth and finally, the trust is trading on discount [of -8.5%] which is near to its five-year lows, last reached during the Covid trough of 2020.

“This is a compelling proposition, not least when you consider there is a bias towards small and mid-caps too, where valuations have been particularly low in recent times and where some investors have made considerable gains.”

Aberforth Smaller Companies

Sticking with the unloved UK, Sullivan at Tyndall’s top pick is a trust in the UK smaller companies sector. Aberforth Smaller Companies (LSE:ASL) can be snapped up at a -10.8% discount.

“It is investing in the eye of the storm, that being smaller companies listed on the UK market, however opportunities often present themselves at the point of greatest despondency,” he says.

“This is increasingly true of the UK, which looks less of a political and economic outlier, while sterling continues to strengthen. Most of the selling pressure on UK equities has played out, and just some modest demand could seriously re-rate the sector.”

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Impax Environmental Markets

Impax Environmental Markets (LSE:IEM) has sold off as sustainable investing has moved out of the spotlight. Its discount (currently -10.0%) is among its widest levels in five years. For Winterflood Securities analyst Emma Bird, it “offers considerable value”.

“We see significant scope for a re-rating in a more stable macro environment, while further downside discount risk is limited to an extent by the fund’s active share buyback programme, with 7% share capital bought back in 2023,” she says.

“Once inflation concerns subside, granting further clarity on the interest rate trajectory, we wouldn’t be surprised to see ESG (environmental, social and governance) feature more prominently in investment decision-making.”

Downing Renewables & Infrastructure

Fairview Investing director Ben Yearsley personally owns Downing Renewables & Infrastructure (LSE:DORE) and recently bought some more.

It has a more than -30% discount (currently -33.6%) and 7%-plus yield. Its dividend is supported by a forecast cash coverage ratio of 1.35x, according to QuotedData, while competitor dividends are barely covered or not at all, says Yearsley.

Yearsley says: “These are among the boring financial reasons I like this trust, but ultimately, it’s about the underlying assets and whether they are any good. This is arguably the most interesting renewables portfolio – a mix of mainly UK solar and Swedish/Scandinavian hydro power with a few batteries thrown in for good measure.”

Octopus Renewables Infrastructure

One of the cheapest companies on Peel Hunt’s value screen, and one that its analysts think is heavily mispriced [at a -28.2% discount] despite performing well is Octopus Renewables Infrastructure (LSE:ORIT).

“Its discount has been in excess of -30% on several occasions since late March and is materially wider than the renewable generation infrastructure peer group weighted average discount of -19%, which we see as placing this trust as an outlier,” says analyst Markuz Jaffe.

In early June, it announced a £10 million share buyback programme and pointed towards further disposal activity. The possibility of interest rate cuts should also support its share price.

TR Property Trust

On to property, and the past two years have been difficult for property investors. “Property is an economically sensitive asset class and a higher rate environment has put pressure on valuations,” says Alex Watts, an investment data analyst at interactive investor.

He likes TR Property (LSE:TRY)’s hybrid approach to investing in pan-European property, owning property securities and physical property. Having been no stranger to trading at a small premium, its current discount of -7.7% makes for relative cheapness.

“Just as markets can be quick to discount property when central banks tighten [monetary policy], the asset class can reprice quickly with the prospect of easing on the horizon,” adds Watts.

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Triple Point Social Housing REIT

Specialised supported housing provider Triple Point Social Housing REIT Ord (LSE:SOHO) has the widest discount of the picks at an eye-watering -55.9%.

“Its rental income is ultimately backed by the government, which pays housing benefit to cover rent,” says QuotedData’s property analyst Richard Williams. “Two of the trust’s 27 registered providers are in material rent arrears, which has knocked confidence but this is being addressed.”

Rents are linked to inflation and rental growth in 2024 should be 5%-6%, the balance sheet is “fairly strong” and the managers are selling properties to fund share buybacks. “There’s always the chance that somebody will bid for it as happened to rival Civitas Social Housing,” adds Williams.

Oakley Capital

Deutsche Numis likes private equity proposition Oakley Capital Investments Ord (LSE:OCI), which focuses on entrepreneur-led companies in the consumer, technology and education sectors in Europe, and can be bought on a -29.0% discount.

“The portfolio is performing well with organic earnings growth of 14% in 2023,” says Ewan Lovett-Turner, head of investment companies research at Deutsche Numis.

He adds: “It is also maturing with positions being held for an average of 3.2 years compared to a four-year average, and the manager has indicated three to six sales could be possible in the next six to 12 months. These exits have the potential to generate cash and prove valuations, which may be a catalyst to narrow the discount.”

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Syncona

For Momentum Global Investment Management, private equity biotechnology appears particularly undervalued. Portfolio manager Richard Parfect highlights Syncona (LSE:SYNC) and its -42.9% discount.

“Around 44% of the portfolio is held as cash,” he says. “Some 11% is Autolus Therapeutics ADR (NASDAQ:AUTL), which is valued at $1.07 billion (£840 million) and holds around $750 million (£588 million) of cash. Its lead treatment for acute lymphoblastic leukaemia is awaiting approval from US and European regulators, but its performance in clinical trials suggests it has a best-in-class safety and efficacy profile.”

Syncona has an active share buyback programme. “While big pharma is actively buying smaller companies, any asset sale from its portfolio could materially increase cash returns to shareholders,” adds Parfect.