Ian Cowie: big bargains on offer for those who go against the crowd

Our columnist runs the rule over an investment trust sector in which some trusts have become fashionable and others remain unloved.

Inflation-busting income at double-digit discounts can still be bought by investors brave enough to bet against financial fashion. Whisper it, but for these investment trusts to be a bargain you need to believe we won’t all be working from home (WFH) and spending all our money shopping online in future.

Conventional commercial property funds, holding office and retail assets, remain out of favour because of the internet and WFH but some are bouncing back strongly. For example, consider the giant BMO Commercial Property (LSE:BCPT) where the shares are currently trading 17.8% below their net asset value (NAV) and yielding 4.2%. Even after the share price soared by 55% over the last year, Mr Market has clearly not forgotten or forgiven dividend cuts and the shrinkage in total returns - or, in plain English, a loss - of 1.4% over the last five years.

Looking under the bonnet, BCPT has 41% of its £1.25 billion assets in offices,15% in retail, and only 11% in warehouses. The latter is the most fashionable or popular type of commercial property because of its exposure to exponential growth in shopping online. That trend looks unlikely to go away but some commercial property trusts trading at bargain prices offer exposure to what might be called ‘clicks and mortar' or a hybrid approach to digital retail.

For example, Ediston Property (LSE:EPIC) focuses on retail warehouses or out-of-town retail parks that enable shoppers to touch what they are buying without worrying about the risk of contagion in crowds or public transport. Some 70% of EPIC’s assets are invested in retail parks with its biggest exposure in Wales, which accounts for 22% of assets, followed by the North East with 16%. By contrast, BCPT is 35% invested in London’s West End and 20% in the South East.

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Despite EPIC’s total returns of 48% over the last year, plus a mouth-watering dividend yield of 6.9%, this £294 million trust continues to trade at a 17.4% discount to its NAV. Once again, the explanation might be that shareholders’ income has been shrinking by an annual average of 2.4% over the last five years when total returns were also negative at -5.3%. That underlines the worry that investors in physical retail are buying the past when, as the historic saying goes, yesterday’s river grinds no flour.

Looking across the Channel to continental Europe, the same contrast can be seen between conventional commercial property funds and those owning warehouses for online shopping. Old-fashioned Schroder European Real Estate (LSE:SERE) is 30% invested in offices, 21% retail and 20% industrial property. But it has delivered impressive returns of 68% over the last year and a respectable 26% over the last five years. It yields 4.6%, yet continues to trade at a 10.6% discount to NAV.

Meanwhile, flavour-of-the-month online warehouse specialists such as Aberdeen Standard European Logistics Income (LSE:ASLI) and Tritax EuroBox (LSE:BOXE) have delivered more modest one-year returns of 23% and 39% respectively, with lower yields of 4% and 3.6%, but trade at eye-stretching premiums to NAV of 18% and 14%.

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ASLI is closest to my wallet because I invested in the initial public offering (IPO) at £1 per share in December 2017, and bought more at 75p per share in March, 2020, so I am glad to see it trade at £1.26p this week. The manager, Evert Castelein, tells me: “Our portfolio has been very resilient despite the pandemic and we have seen 100% of rent collected for the second quarter of 2021.”

He adds: “E-commerce in Europe has so much further to grow that overall long-term demand for space will continue to rise.”

Justin Bell, a director of Numis Securities, commented: “I think ASLI offers investors the best way to access the strongly performing logistics sector on the continent.

“The fund has built up a strong portfolio of 16 assets, with a clean structure with low management fee of 0.75% of NAV and a yield of 4%.

“While the current 18% premium to NAV may be pricing in some of the upside, this premium could disappear with more years like the last. Having good assets in strongly performing sectors such as this make tenant defaults less of a concern compared with the likes of the retail or office sectors.”

It’s always reassuring and often rewarding to see an asset you own become fashionable. But that’s no guarantee of future returns from ASLI or BOXE. If we have seen peak WFH and some shoppers persist in wanting to touch before they buy, BCPT and EPIC might prove to be better bargains for the brave.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor. 

Ian Cowie owns shares in Aberdeen Standard European Logistics Income (ASLI) as part of a diversified portfolio of investment trusts and other shares.