Ian Cowie: trust tips to tap into Brexit-blighted British shares

Three UK investment trusts, despite being in good form, have cheap price tags, says our columnist.

Contrarian investors, who like to buy when others sell, should consider Brexit-blighted British shares, priced at the bottom of the bargain bin. Never mind the politics, here’s the economic case in a nutshell: buying low is often the first step towards making a profit.

Nowhere is UK Plc lower priced than at the smaller end of the scale because, while size is no guarantee of safety, corporate tiddlers tend to have less diversified businesses and lower contingency reserves. So, if it all goes wrong, these minnows are most likely to turn their toes up.

In early October, three new investment trusts had announced their intentions to reduce the risk of catastrophic losses in British smaller companies by diversification and professional stock selection. Bear in mind, these tiddlers might bounce sharply higher - if they can survive the economic winter ahead.

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But, at the time of publication (8 October), one of the trio has pulled the plug: Tellworth British Recovery & Growth Trust (LSE: TBRGT). Tellworth Investments informed the market “the overall level of demand was insufficient” to meet its minimum fund size target of £100 million. 

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Time will tell whether the other two trusts have more success in their fundraising attempts. Keith Ashworth-Lord, founder of Sanford DeLand Asset Management, is launching the UK Buffettology Smaller Companies investment trust (LSE: BUFF). Elsewhere, City giant Schroder Investment Management also has an initial public offering (IPO) in this sector - the Schroder British Opportunities trust - but could not tell me what its ticker will be when I asked. 

Ashworth-Lord has an impressive record of finding value among Britain’s corporate minnows - and hanging on when they grow into much bigger fish. For example, he told me about Games Workshop (LSE:GAW) about five years ago, when few adults had heard of this provider of fantasy toys for boys of all ages.

Sad to say, I admired Ashworth-Lord’s enthusiasm for GAW but failed to invest and have watched with gritted teeth ever since as they soared into the stratosphere. GAW is up 126% over the last year and by an eye-watering 1,883% over the last five years. Truly, it is the ones that get away that hurt and haunt investors in the middle of the night.

Against all that, fortune may favour the brave, but for every hero who is still celebrated there might be several casualties who are long forgotten. Sometimes discretion is the better part of valour.

For example, there is no need to pay full price for an IPO, where issue costs are likely to absorb 2% or more of net asset value (NAV). There are 25 investment trusts in the Association of Investment Companies (AIC) UK Smaller Companies sector already and their average share price is 12% lower than their NAV.

Discounts are no guarantee of value but paying 88p for £1 of underlying assets does provide a comforting margin for error in this notoriously hit-or-miss sector. Full disclosure: both my bets on British smaller companies investment trusts are barking like dogs - and not the pedigree kind that make it to Crufts.

Step forward, Rights & Issues (LSE:RIII) and Schroder UK Public Private (LSE:SUPP) - which was originally launched as Woodford Private Capital. 

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Suffice to say, SUPP has been a disaster, wiping out 71% of the cash I invested five years ago. The only thing I got right there was to limit my stake to 1% of my forever fund, so it doesn’t hurt too much to hang on in hope for a better second half of the 10-year view on which I originally invested.

Last December, I added Rights & Issues, where I am currently 12% down. However, it hardly seems fair to blame its manager of 36 years, Simon Knott, whose family own 15% of this fund, when 2020 has been cursed by the coronavirus crisis.

So, I intend to remain invested on the basis that Rights & Issues might return to form. It remains the top performer in its sector over the last decade, with a total return of 404%, and it delivered 63% over the last five years, according to independent statisticians Morningstar.

More recently, Miton UK Microcap (LSE:MINI) shot the lights out over the last very difficult year with a total return of 20%, followed by Standard Life UK Smaller Companies (LSE:SLS) with 17% and JPMorgan Smaller Companies (LSE:JMI) with 16%. The latter even delivers a modest yield of 2.2%.

All three of these trusts trade at discounts - MINI is priced 13% below its NAV; for SLS it is 5%; and JMI is 16% cheaper. So, all three seem better value for anyone brave enough to buy British smaller companies today.

Ian Cowie owns shares in Rights & Issues (RIII) and Schroder UK Public Private (SUPP) investment trusts, as part of a diversified global portfolio.

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

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