The cheapest investment trust sectors right now
23rd November 2022 09:07
by Sam Benstead from interactive investor
Stock market pessimism is creating investment opportunities for bargain hunters.
Since the beginning of the year the discount of the average investment company has widened more than 10 percentage points, from 3.6% to 14.3% at the start of this week.
The data, from trade body the Association of Investment Companies (AIC), shows how investors are spoilt for choice when looking for investment trust bargains, with 37 out of 38 sectors now trading at discount.
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.
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%.
Popular North America trusts include Baillie Gifford US Growth (12.5% discount); Pershing Square Holdings (33% discount); and North American Income Trust (9% discount).
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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.
Equity sectors discounts
| Discount on 18 November 2022 (%) | Discount on 31 December 2021 (%) | Change since 31 December 2021 (% pts) | |
|---|---|---|---|
| North America | -26.5 | -21.1 | -5.4 |
| India | -14.9 | -12.9 | -2 |
| Global Emerging Markets | -12.4 | -8.7 | -3.7 |
| Commodities & Natural Resources | -12 | -16.9 | 4.9 |
| Asia Pacific Smaller Companies | -11.9 | -8.8 | -3.1 |
| Global Smaller Companies | -11.5 | -3.8 | -7.8 |
| Country Specialist | -11.1 | -18.3 | 7.2 |
| China / Greater China | -10.9 | -3.4 | -7.5 |
| UK Smaller Companies | -10.8 | -8 | -2.8 |
| Technology & Media | -10.3 | -1.8 | -8.5 |
| Asia Pacific | -9.8 | -3.8 | -6 |
| European Smaller Companies | -9.8 | -8.8 | -0.9 |
| UK All Companies | -9.1 | -7.6 | -1.5 |
| Europe | -8.8 | -6.3 | -2.5 |
| Biotechnology & Healthcare | -8.2 | 0.9 | -9.2 |
| Japanese Smaller Companies | -8 | -1.6 | -6.4 |
| Asia Pacific Equity Income | -6.1 | -4 | -2.1 |
| Global | -6 | -0.8 | -5.2 |
| Japan | -5.4 | -3.1 | -2.3 |
| UK Equity Income | -3.5 | -4 | 0.5 |
| Global Equity Income | -1.6 | -2.7 | 1.1 |
| Environmental | -1.3 | 6.7 | -8 |
Source: AIC/Morningstar. Weighted averages for AIC sectors with at least three constituent companies.
The alternatives sector also has very high discounts, but the AIC warns that they can be misleading as they are based on current share prices and the most recently reported net asset values (NAVs), which can be out of date.
The most deeply discounted alternatives sector is Growth Capital on a 43.4% discount, followed by Property – Europe on 42.8%.
Growth Capital trusts buy fast-growing but risky private companies. Leading trusts in the sector include Chrysalis Investments (56% discount); Schroder UK Public Private Trust (49% discount); and Schiehallion Fund Limited (22% discount), managed by Baillie Gifford.
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The alternatives sectors that have seen the biggest widening of their discounts are Property – UK Logistics (47 percentage points) and Property – Europe (42.2 percentage points).
Alternatives sector discounts
| Sector | Discount on 18 November 2022 (%) | Discount on 31 December 2021 (%) | Change since 31 December 2021 (% pts) |
|---|---|---|---|
| Growth Capital | -43.4 | -3.6 | -39.9 |
| Property - Europe | -42.8 | -0.6 | -42.2 |
| Insurance & Reinsurance Strategies | -36.2 | -22.7 | -13.5 |
| Property - UK Residential | -35.4 | 0.4 | -35.8 |
| Property - UK Logistics | -32.7 | 14.3 | -47 |
| Leasing | -30.2 | -24.2 | -6 |
| Property - UK Commercial | -25.6 | -10.3 | -15.3 |
| Private Equity | -24.8 | -1.4 | -23.4 |
| Debt - Direct Lending | -17.4 | -6.1 | -11.2 |
| Property - Debt | -16.1 | -7.2 | -8.9 |
| Debt - Structured Finance | -10.5 | -10.7 | 0.2 |
| Debt - Loans & Bonds | -5.3 | -4.2 | -1.1 |
| Infrastructure | -2.3 | 14.3 | -16.6 |
| Renewable Energy Infrastructure | -1.5 | 6.5 | -8 |
| Hedge Funds | 3.8 | -1.8 | 5.5 |
Source: AIC/Morningstar. Weighted averages for AIC sectors with at least three constituent companies.
Do these discounts offer value?
Just because an investment trust is cheap, does not mean it is good value. The value of the underlying investments – the NAV of a trust - may be too generous. Or the sector could be facing serious headwinds, meaning now may be a bad time to buy.
Nevertheless, investors are susceptible to panicking, becoming too pessimistic when times and bad and too optimistic when times are good. Periods of panic are often good entry points for long-term investors.
Anthony Leatham, head of investment companies research at Peel Hunt, says China trusts look attractive at current valuations.
Leatham said: “While 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. 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 investment returns.”
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Priyesh Parmar, associate director of investment companies research at Numis, highlights the opportunities he sees in Vietnamese investment companies.
Parmar said: “The economy is performing strongly and inflation remains below the central bank’s 4% target. The reasons for the sell-off appear concentrated in an area of the market to which the listed funds have no direct exposure.
“Therefore, we believe this presents a strong buying opportunity. As Vietnam appears on the radar of more generalist investors, this should provide a positive backdrop for the country and we believe there is potential for a tighter discount on the listed funds to be more sustainable in future. Furthermore, investors have the potential future catalyst of MSCI Emerging Markets inclusion, albeit this is at least a few years away.”
Another sector tipped by the pros is private equity. Iain Scouller, managing director of investment funds at Stifel, says that while there may be short-term pain, investors are being too pessimistic.
Scouller says: “Despite some very strong net asset value performance in recent years, many of the private equity funds were trading on discounts of 15% to 25% at the start of 2022. While some haircuts to NAVs are to be expected in this environment, we think discounts are excessive.”
Leatham says HarbourVest Global Private Equity is his top pick in the sector. It has delivered 23% annualised NAV total return over the last five years and is trading on a 45% discount to the end of September 2022 NAV.
“In our view, this is a rare discount opportunity for this company and one that has appeared only six times in the last 15 years,” he said.
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