Ian Cowie: these double-digit discounts are surprising
Sparkling returns have been delivered over one and five years for this region. Despite this, investment trusts that focus on it are trading on big discounts.
16th January 2025 09:19
by Ian Cowie from interactive investor
Donald Trump’s inauguration as America’s 47th president next Monday will be marked by much wailing and gnashing of teeth among folk who loathe the man. But it might also mark a major money-making opportunity for investment trusts in the biggest economy on Earth. Trusts remain priced in the bargain basement, at an average of 23% below their net asset value (NAV).
- Invest with ii: Buy Investment Trusts | Top UK Shares | Open a Trading Account
Double-digit discounts are surprising after the S&P 500 index delivered sparkling returns of 22% over the past year and 75% over five years. By contrast, the FTSE 100 benchmark of Britain’s biggest shares lagged behind with 8.3% and 7.2% respectively.
Sad to say, part of the explanation for such a large average US discount is the inclusion in the Association of Investment Companies (AIC) “North America” sector of the C$1.6 billion (£903) Canadian General Investments Ord GBP (LSE:CGI), in which I own shares. This fund holds all-American giants - including the chipmaker NVIDIA Corp (NASDAQ:NVDA), the iPhone firm Apple Inc (NASDAQ:AAPL) and the credit card company Mastercard Inc Class A (NYSE:MA) - but delivered total returns over the past decade, five-year and one-year periods of 190%, 76% and 18%, according to Morningstar statisticians.
- High-yielding fund ideas for income seekers in 2025
- Where the pros are investing beyond the Magnificent Seven
There’s nothing wrong with those results, especially when they include dividend income of 2.4%, rising by an annual average of 4.6% over the past five years. Unfortunately, Canada lacks any equivalent of the American single-sheet form W-8BEN, which enables British investors to avoid withholding taxes.
So CGI’s net income is nobbled by the local taxmen, depressing this trust to trade at an eye-watering -42% discount to its NAV. Even interesting underlying holdings - including Shopify Inc Registered Shs -A- Subord Vtg (NYSE:SHOP), which might be regarded as Canada’s answer to Amazon.com Inc (NASDAQ:AMZN) and the self-descriptive Canadian Pacific Kansas City Ltd (NYSE:CP) railway - can’t seem to lift CGI nearer to NAV.
Something similar afflicts Pershing Square Holdings Ord (EURONEXT:PSH), which is the top-performing investment trust in this sector over the past five years, but still trades -31% below its NAV. It has delivered total returns over the usual three periods of 125%, 165% and 8.4%.
Underlying holdings include Restaurant Brands International Inc (NYSE:QSR), which owns Burger King, plus Chipotle Mexican Grill Inc (NYSE:CMG) and Hilton Worldwide Holdings Inc (NYSE:HLT), the hotels group. The dividend yield on PSH is a modest 1.2%, albeit rising by an impressive annual average of 7.8%.
- Terry Smith defends fourth year of underperformance
- Why these are the investment areas to watch in 2025
The top performer over the past year, by a Texan country mile, is Baillie Gifford US Growth Ord (LSE:USA), with a total return of 47%, following 81% over five years. This fund lacks a 10-year record, having been launched in 2018 and trades a modest -7% below NAV.
Once again, USA’s largest underlying holdings include Nvidia, Amazon and Shopify. But billionaire Elon Musk is also represented by two companies in its top 10, with Space Exploration Technologies or SpaceX, the rockets and satellites company, plus Tesla Inc (NASDAQ:TSLA), the electric vehicles business. Meta Platforms Inc Class A (NASDAQ:META), which owns Facebook and Instagram, is also in USA’s top 10, but there are no dividends at all.
Yield-seekers could go north of the border to Middlefield Canadian Income Ord (LSE:MCT), where a variety of energy companies and banks, which are not household names in Britain, have generated total returns of 101%, 47% and 27% over the usual three periods; plus sector-leading income of 4.6%. Unfortunately, this is rising very slowly by 0.96% per year. The shares are priced -11% below NAV.
Income-seekers willing to accept a lower initial yield with hopes of higher dividend growth might consider North American Income Trust Ord (LSE:NAIT). It currently yields 3.5% and dividends increased by an annual average of 6.6% over five years. Total returns over the standard periods are 166%, 33% and 20%.
- Nick Train adds two new shares to UK portfolios
- Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
NAIT trades at a 12% discount to NAV and its underlying portfolio is led by the pharmaceutical giant Merck & Co Inc (NYSE:MRK), followed by the medical equipment-maker Medtronic (NYSE:MDT), which produced the first internal cardiac pacemaker. Unfortunately, the health theme takes a turn for the worse lower down NAIT’s top 10 with Philip Morris International Inc (NYSE:PM), the tobacco giant best known for Marlboro cigarettes.
Returning to where we began with the imminent beano at Washington on Monday, Trump 2.0 promises to deliver tax cuts, less government and more innovation - which will be in stark contrast to British tax hikes, more government and rising regulation. It will be interesting to see which approach to stimulate the economy works best.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie is a shareholder in Apple (AAPL) and Canadian General Investments (CGI) as part of a globally diversified portfolio of investment trusts and other shares.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.