Top 20 investment trusts that have seen their discounts narrow

For about 18 months, there’s been no shortage of investment trust bargain opportunities, with the average trust discount typically trading at around -15%.

Each week, we highlight the biggest discount movers in our Discount Delver article, the latest of which can be found here.

We recently examined the headwinds facing investment trusts, and explained why there has been a pick-up in consolidation for the sector, a trend that is expected to continue.

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For this article, we asked QuotedData, the investment trust analyst, to crunch the numbers to reveal which trusts have bucked the trend and seen their discounts narrow over the past year.

The top 20 “discount decliners” feature investment trusts that, a year ago, were notably out of favour because their investment style, asset class, region, or indeed all three, had been hit by rising interest rates.

However, from around late October 2023 onwards, when markets and investors started to accept that the rate cycle had peaked, there was a marked change in fortunes, and various out-of-form investment trusts began to rally, which caused their discounts to narrow.

There are other factors at play on a case-by-case basis, according to James Carthew, head of investment companies at QuotedData.

Carthew says that Hipgnosis Songs (LSE:SONG), which tops the table after its discount narrowed from -46.4% to trade at a 5.7% premium, enjoyed a share price boost after a bidding war broke out. Tritax EuroBox Euro (LSE:BOXE), in third place in the table, has also been attracting potential suitors.

Second in the table is the Baillie Gifford-managed Schiehallion Fund (LSE:MNTN), which may have benefited from positive news stories about SpaceX, says Carthew.

He adds: “[Space X] is its largest holding, 8% of the portfolio at end June, and likely to be written up as it wins a major contract from NASA to return the International Space Station to Earth and it sells shares at a new price high. Otherwise, it may be on optimism that interest rates have peaked and will now fall – although it isn’t obvious why it has done so much better than other growth capital funds.”

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Two others from the Baillie Gifford stable make the table: Edinburgh Worldwide (LSE:EWI) and Scottish Mortgage (LSE:SMT). Over a one-year period, the former as seen its discount narrow from -20.8% to -8.3%, while the latter's discount has reduced from -17.9% to -8.9%. Both have benefited from expectations that the direction of travel for interest rates is down, rather than up.

Carthew says that in the case of Edinburgh Worldwide “small cap and growth have both been out of favour, but there are tentative signs that this is changing”. Edinburgh Worldwide also owns SpaceX, which is its top holding, with a 11.8% weighting.

For Scottish Mortgage, a big driver has been its board proactively aiming to tackle the discount with a share buyback programme. While share buybacks are no panacea, as we have previously explained, they are a useful tool to attempt to rein in a discount.

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In March, Scottish Mortgage said it had made at least £1 billion available for buybacks over the next two years. The decision was made following activist investor Elliott taking a stake.

Carthew adds that “positive noises” around Scottish Mortgage’s portfolio – both listed and unlisted stocks – also helped narrow its discount. Unlisted stocks account for 25% of the portfolio, with 30% being the maximum limit.

He says: “When it announced the buyback, [Scottish Mortgage] made positive noises around free cash flow in that both public and private companies were delivering strong results, had adapted to a higher cost of capital, doubled free cash flow in a year, and were funding their own growth. This likely provided some comfort around Scottish Mortgage’s gearing, which was also being paid down, as well as its ability to fund follow-on investments, that had also become a concern.”

Past performance is not a guide to future performance.

Carthew points out that despite these 20 trusts seeing their discounts narrow the most over the past year, there are still some potential bargains.

He describes a -42% discount for Seraphim Space Investment Trust (LSE:SSIT) as being “way too wide”. He adds: “What may be needed is a disposal that would demonstrate the value within the portfolio. In the meantime, as most shareholders seem to be in it for the long term (as they should be in this sort of trust), relatively small amounts of sales and purchases can swing the discount around. From a long-term perspective, the current -42% discount seems way too wide.”

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Tufton Oceanic Assets (LSE:SHIP) and Patria Private Equity Trust (LSE:PPET) are also seen by Carthew as potentially offering more discount value.

For the former, Carthew says “it may now need an interest rate cut to get the discount lower than the current -15% level.”

While for the latter, he notes: “Patria Private Equity Trust is abrdn Private Equity Opportunities – now under new ownership but with the same great team. This trust has an amazing track record but hasn’t had the recognition that it deserves for this. Its discount should be a lot tighter.”  

Performance is the biggest driver of returns

While investment trust discounts are an opportunity to buy a basket of investments for less than the sum of their parts, over the long term it is the performance of those underlying investments that has the biggest influence on the overall total shareholder returns. Put simply, if the trust doesn’t perform well, it is likely to consistently have a high discount due to a lack of demand for the shares.

Another important thing to bear in mind with investment trust discounts is that they typically have a greater tendency to converge to their mean discount rather than the value of their underlying investments.

Therefore, it is useful to consider the current discount versus history, and take a view over one, three and five years, for example. It is also worth comparing an investment trust discount with its wider sector.

Bear in mind that some trusts consistently sit in a tight discount range, meaning it is not a “true” bargain and the discount is merely “normal”.

Also be aware that when it comes to investment trust premiums, it is not usually worth paying over the odds. This is because high premiums do not tend to be sustainable over the long term. When conditions change, such as when investors become more cautious, premiums can fall and turn into a discount. When this happens, shareholder returns are negatively impacted.