How Andrew Pitts’ 20 trust tips are faring amid discount pain

Something of a somnambulant summer for global stock markets saw the conservative investment trust portfolio eke out a decent 2.7% gain, but the 10 investment trusts in the adventurous version slipped to an average loss of -1.7% over the quarter to 30 September.

By way of comparison, the FTSE All-Share index gained 1.9% and the FTSE All-World index (which includes emerging markets) ended the quarter up 0.8%.

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Summer is usually a sleepy time for stocks, but the conservative portfolio’s benchmark-beating uplift marked the fourth consecutive quarter of gains and, in the process, contributed to a decent annual return of 12.2%. While providing more diversification than the FTSE All-Share index, which is up 13.8% over the year, the conservative portfolio is doing better than the more representative FTSE All-World index, up 10.6%.

How the portfolios are performing

Notes: Performance of the portfolios as at 30 September 2023, before deduction of underlying trading charges. Data source: FE Analytics. Past performance is not a guide to future performance.

That’s a pretty good show given that investment trusts remain deeply out of favour with investors at large. Analysts at stockbroker Investec Securities say that discounts to net asset values are approaching levels last seen during the global financial crisis in 2008-09.

At a recent conference organised by the Association of Investment Companies (AIC), Investec made a presentation reflecting the views of leading investors on the key issues facing the industry today.

Chief among these were concerns that investment trust boards risk becoming complacent about high discounts to NAV becoming entrenched. It’s also clear that some boards seem reluctant to buy back their own shares at a discount in the bad times, although many of the trusts they oversee were very happy to issue new shares at a premium to NAV when sentiment was buoyant.

• Andrew Pitts’ 10 adventurous investment trust tips: July 2023
• Andrew Pitts’ 10 conservative investment trust tips: July 2023

As Investec suggests, it makes a great deal of sense for most trusts –  even those trusts investing in illiquid assets such as private equity – to reinvest in an existing portfolio of companies at a discount to NAV via share buybacks. As they say: “Buybacks should not be a binary choice. We strongly believe that they should be an integral part of a coherent capital allocation strategy, which should be clearly articulated to shareholders.”

They warn that if more boards do not grasp the nettle, activist investors will “take matters into their own hands”.

The board of one trust in the conservative portfolio has clearly demonstrated conviction in its investment strategy. Pantheon International Ord (LSE:PIN), the private equity specialist, made an audacious move to address its persistently high discount to NAV (see conservative portfolio review for details). The trust’s share price gain of 14.5% over the quarter – the highest among all 20 trusts in the portfolios – is not purely coincidental.

More trust boards should consider adopting specific measures to reduce their discounts, particularly trusts that are touted as decent alternatives to big, open-ended funds and unit trusts.

For example, shares in diversified global trusts with more than £1 billion under management such as Bankers (LSE:BNKR), AVI Global Trust (LSE:AGT), F&C Investment Trust (LSE:FCIT) and Monks (LSE:MNKS) are regularly trading at discounts of 10% or higher. Some, such as Bankers, have been slipping to wider discounts despite regularly buying back packets of their shares.

In contrast, shares in the £2.9 billion Alliance Trust (LSE:ATST) have been trading at a steady discount of around 5% for the past five years. Its shareholders will surely be happier with this sort of stability than shareholders in several of its peers.

Conservative portfolio shines

Eight of the 10 trusts in the portfolio posted returns that were in the first or second quartile of their respective sectors, with only JPMorgan Emerging Markets (LSE:JMG) (-1.2%) and Finsbury Growth & Income (LSE:FGT) (-3.6%) letting the side down over the quarter ending 30 September.

It was good to see Schroder Japan Trust (LSE:SJG) register a top quartile return of 6%, having been introduced in favour of JPMorgan Japanese (-5.9%, a little lower than the sector average) in July’s annual review. 

But pride of place in the portfolio goes to Pantheon International. Shareholders gained 14.5% over the quarter, lifting its gain over the past six months to 25.1% and 21.2% over the year.

This private equity trust, which has a market capitalisation of £1.53 billion, had been trading at a persistently wide discount to NAV of close to 50% earlier in the year, but it also breached that level at some points in 2022.

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But in late September the board invited shareholders to sell a very large chunk of the issued share capital back to the trust. It will buy back up to £150 million of shares in this tender offer, at a price of no less than 280p and up to 315p, for shares tendered by 17 October.

However, as part of these efforts to reduce the persistently wide discount, it has also committed to buy back another £50 million of its shares – making a total of £200 million – by the end of its financial year on 31 May 2024.

Compared with its last published NAV of 458.7p on 31 August, that leaves Pantheon International’s shares trading on a much-reduced discount to NAV of 36%. While that level remains historically high, the trust’s board should be applauded for taking concrete measures to potentially enhance NAV returns for shareholders who wish to remain invested (by reducing the number of shares in issue) while also offering other shareholders an exit at a guaranteed price.

JPMorgan American (LSE:JAM) continues posting decent returns, with a 5.7% total return over the quarter further enhancing its excellent performance over the medium term. Investors clearly like the differentiated investment approach of identifying the best value- and growth-focused opportunities in the market, with the trust’s shares consistently trading on a sub-5% discount to NAV.

Fidelity Special Values (LSE:FSV) also posted a market-beating return of 4.8% over the quarter and, with a gain of 17% its one-year record is now usefully ahead of the benchmark FTSE All-Share index, while over the past three years its 68.2% total return is far ahead of the benchmark’s 39.8%.

Conservative portfolio eking out incremental gains

Notes: *Holdings ranked by total return over the past quarter. Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 30 September 2023. Past performance is not a guide to future performance.

Adventurous portfolio still struggles

As with the conservative version, the adventurous portfolio’s private equity holding ruled the roost in the third quarter, with NB Private Equity Partners (LSE:NBPE) posting a decent 7.8% gain. Its half-year results to 30 June, released in late September, featured a resilient portfolio of direct investments geared towards secular growth with limited downside risk, according to analysts at Hardman & Co.

The firm believes that the discount to NAV, of around 33%, is anomalous on an absolute and relative basis, given the resilience of the portfolio, with the trust’s holdings valued on a conservative basis.

Pershing Square Holdings GBP (LSE:PSH), the highly focused US trust managed by high-profile investor Bill Ackman, justified its introduction to the portfolio in July’s annual review with a quarterly gain of 5.1%.

Despite buying back shares of up to $100 million in the first half of this year (taking the total since May 2017 to $1.19 billion), the discount to NAV remains very wide at 36%. Expressing the board’s dissatisfaction at the persistently wide discount in the trust’s interim report to 30 June, chair Anne Farlow said: “The board continues to believe that the discount will close over time if PSH continues to deliver strong investment performance, and if more potential investors learn about our strategy and long-term track record.”

The trust it replaced, Baillie Gifford US Growth, has made a 10% gain at the NAV level in the year to date (not far behind PSH), however last year’s abandonment of a share buyback programme appears to have dented investor confidence, with a further widening of its discount to NAV to -23% translating into a small loss at the share price level in 2023 to date.

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It goes to show that the growth strategies employed by most of the trusts in the adventurous portfolio continue to be unpopular while interest rates remain high, and investors fret that they will remain high for a prolonged period.

Mobius Investment Trust (LSE:MMIT), the emerging markets smaller companies specialist, posted a decent gain of 3.1% over the quarter. But the adventurous portfolio’s two other overseas smaller companies trusts struggled.

Montanaro European Smaller Companies (LSE:MTE) suffered an uncharacteristically poor quarter, with an outsized loss of -13.7%, in the process denting its one-year gain, which is still a decent 12%.

The same cannot be said for Baillie Gifford Shin Nippon (LSE:BGS), with a -9% loss over the quarter doing further damage to the longer term total returns, which now stand at -17.1% over a year and a thumping -46.1% loss over three years. During that period the trust’s rating has slipped from a premium of 13% to NAV to a discount of 14%.

Like most Baillie Gifford-managed trusts, Shin Nippon says its performance should be judged on a minimum five-year view. But at -37.6%, it is severely lagging the MSCI Japan Small Cap benchmark index, which is up 5% over that period. Patient investors, including this portfolio constructor, could soon become less forgiving.

While I continue to believe that the admittedly tough global macroeconomic conditions do not necessitate a wholesale revamping of the adventurous portfolio, there is a growing clamour for trusts to address persistently wide discounts to NAV. Boards should be encouraged to adopt better measures to protect and advance the interests of their shareholders. 

Uphill struggle for many adventurous portfolio members 

Notes: *Holdings ranked by total return over the past quarter. Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 30 September 2023. Past performance is not a guide to future performance.