Bargain Hunter: window of opportunity for these trust discounts

We explain why these investment trusts catch the eye, both in terms of their discounts and how they invest. 

Both UK equities and the value style of investing have been out of favour for a considerable amount of time, but various commentators argue this could be about to change.

In recent weeks, there have been early signs of a market rotation taking place, with a move away from the ‘stay at home’ stocks that have benefited from lockdown to recovery stocks.

Rory Campbell-Lamerton, co-manager of the SVS Church House UK Equity Growth fund, notes: “Vaccine news has triggered a major change in sectoral leadership away from the growth/momentum sectors and back to ‘value’.”

He adds: “In the UK market, energy, financials and consumer discretionary stocks all rallied hard on the vaccine news (in early November) while in turn, the big tech stocks had some of the froth blown off them. Businesses such as Trainline (LSE:TRN), Greggs (LSE:GRG), Beazley (LSE:BEZ) and Shaftesbury (LSE:SHB) are far too good to be depressed for long in our opinion.”

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However, there have been numerous false dawns over the past couple of years for the predicted resurgence of value investing, which is the investment discipline of buying out-of-form shares that are trading at a notable discount to their intrinsic value. This time, the theory is that in the event of a successful roll-out of a Covid-19 vaccine, economic conditions will start to improve, which could provide the catalyst for value stocks to outperform growth stocks.

Philip Matthews, co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income funds, says despite the uncertainty over how the Covid-19 crisis and Brexit negotiations will unfold, the valuation backdrop “provides an exceptional foundation upon which to build a value-based investment portfolio”.

He adds: “Within the UK market, investors need to go back to the early 1980s to see similar valuation discounts being applied to value stocks. Moreover, the premium being paid for defensive stocks over cyclical stocks is as wide as it was during the financial crisis.

“Valuations across a number of more domestically exposed sectors, such as banks and housebuilding, have fallen to such an extent that, if they were to return to the depressed valuation levels they reached immediately after the 2016 Brexit vote, their share prices would actually rise, despite negative downgrades to earnings forecasts due to Covid-19.”

Matthews has recently added four investment trusts to his portfolios to take advantage: Temple Bar (LSE: TMPL), Aberforth Smaller Companies Trust (LSE: ASL), Polar Capital Global Financials Trust (LSE: PCFT) and Standard Life Investments Property Income Trust (LSE: SLI).

“All provide exposure to existing value themes within the portfolio at discounts to their underlying asset values, while their investment trust structure allows them to maintain dividend payments,” says Matthews.

He adds: “More volatility lies ahead, but this exceptional window of opportunity will not stay open forever.”

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Of the four trusts highlighted by Matthews, the widest discount is Standard Life Investments Property Income Trust, which according to Winterflood, as of close of trading at the end of last week (27 November), was trading on a discount of 30%. This does not come as a surprise, given the deeply uncertain outlook for property during Covid-19.

Elsewhere, Temple Bar and Aberforth Smaller Companies Trust were trading on discounts on 6.5% and 4.5%, while Polar Capital Global Financials Trust had moved to a small premium of 1.8%. Prior to that, the trust had been trading on a discount. As previous Bargain Hunter columns have pointed out, this shows how quickly some discount opportunities  vanish.  

The investment trust analyst Numis favours Fidelity Special Values (LSE: FSV), for investors looking to benefit from a recovery in value stocks. However, the trust is currently trading on a small premium, so it may pay to wait for a better entry point.

Two other value-focused trusts trading on discounts are Lowland (LSE: LWI) and Merchants (LSE: MRCH). Lowland is trading on a discount of around 4.8%, while Merchants is trading on a discount of 3.6%.