Biggest investment trust sector discount moves so far in 2022

There have been some dramatic discount declines in 2022, opening up some potential bargain opportunities for investment trust fans.

It has been a tough year so far for investment trusts, as market sentiment has nosedived in the face of soaring inflation, the Russian invasion of Ukraine and the increasing risk of a global recession.

The average share price discount to underlying net asset value (NAV) for investment trusts stood at 2.2% at the beginning of the year, but plummeted to 9% as at 30 June, according to the latest Winterflood Securities monthly report.

However, that headline de-rating has not affected all investment trust sectors to an equal extent. While by far most sectors saw their discount widen, a small number saw discounts narrow or move on to small premiums.

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That group was led by Forestry & Timber (although it’s worth noting that this sector was hit hard in June), Infrastructure Securities, Commodities & Natural Resources and Latin America.  

At the other end of the chart, Growth Capital, perhaps unsurprisingly, has had the roughest ride, with its discount moving by around 45 percentage points since the start of 2022.  

Andrew McHattie, publisher of the monthly Investment Trust Newsletter, observes that the sell-off has been driven by the shift in future expectations as the economic environment has deteriorated.

“Rising inflation and interest rates have soured the case for growth companies, where future potential earnings are discounted to the present at a higher rate,” McHattie explains.

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The upshot for the Growth Capital sector has been dramatic, McHattie points out: “It has resulted in big discount declines for trusts such as Seraphim Space Investment Trust (LSE:SSIT), Chrysalis Investments (LSE:CHRY)and RTW Venture (LSE:RTW),where the managers all report little change in the immediate operating performance of the underlying companies, but brutal markdowns in their valuations.

“Sentiment plays a big part in this too, leading to some indiscriminate selling and over-shooting on the downside.”

Emma Bird, an analyst at Winterflood, comments that Private Equity, third from the bottom with a discount decline of almost 20%, is in a similar boat to Growth Capital.

“These sectors provide exposure to unlisted companies, primarily relatively early stage, growth businesses. In the last few months, these funds have seen significant share price falls against a backdrop of increased inflationary expectations and the corresponding market rotation from 'growth' to ‘value’,” she explains.

Private equity trusts are particularly vulnerable as valuations are only undertaken every few months. As a consequence, investors anticipate that a number of NAVs will be out of date and are likely to see declines at the next valuation point, as the listed companies with which they are compared have seen notable share price declines in the intervening period.

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McHattie points out the current news from portfolios, including realisations (cash generated from selling holdings), seems greatly at odds with the falling share prices of trusts.

He argues that if public markets bounce or private equity valuations hold up better than anticipated, “there could be some real bargains here in quality trusts on wide discounts, including HarbourVest Global Private Equity (LSE:HVPE), Pantheon International (LSE:PIN), HgCapital (LSE:HGT),and more”.

Both the growth capital and the private equity sectors could continue to face headwinds if the current inflationary/recessionary environment persists, as the market is likely to continue to favour value over growth against that backdrop, says Bird.

However, she too sees a buying opportunity: “We view these as long-term investment vehicles, suitable for investors who can look beyond the shorter-term price and NAV movements.”

Nipping at the heels of the Growth Capital sector, Property - UK Logistics has seen the second largest discount de-rating over the year-to-date, while Property - Europe (where two of the four funds invest solely in industrials and logistics) is fourth from bottom.

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“Industrial & Logistics has been the standout performer amongst the major real estate sectors for a number of years, primarily driven by the rise in e-commerce penetration, and all five investment trusts focused on this area were trading at premiums at the beginning of the year,” explains Bird.

The sell-off has occurred as investors have factored in potential falling demand and a rebalancing of the market; in particular, news from Amazon in the spring that it was scaling back its demand for storage space hurt sentiment.

But despite this recent negative rhetoric, Bird takes an upbeat long-term view. She says: “We believe that the backdrop for the Industrial & Logistics sector in the UK and Europe remains supportive, with continued demand for space for e-commerce distribution and a desire to increase inventory levels in the wake of supply chain disruptions, combined with an enduring shortage of supply. In our opinion, the current discount levels offer an attractive entry point relative to their historical values.”