Where to find investment trust bargains at the start of 2020

Our investment trust bargain hunter goes in search of value opportunities at the start of the new year.

Over the past couple of years investment trust investors have not needed to broaden their horizons in pursuit of potentially mispriced discount opportunities, but at the start of 2020 the UK has lost its crown as being the most loathed stock market in the world.

In the lead-up to the general election and indeed in the days that followed, UK equities came back into favour with both domestic and international investors. The expectation was that Boris Johnson would secure a majority government for the Conservative Party, and on that front he delivered.

To borrow a stock market phrase, he ‘surprised on the upside’ in terms of securing a larger majority than opinion polls had predicted ahead of polling day. Markets warmly welcomed the outcome, as by the end of January there will finally be some form of clarity on the shape and form Brexit will take. 

While a case can be argued that certain UK shares, particularly those more geared to the fortunes of the UK economy, remain cheap and therefore have plenty of upside, UK-focused investment trusts can no longer be picked up at knockdown prices.

Over the past six weeks discounts have been narrowing for UK trusts pretty much across the board. At the start of 2020 the vast majority of trusts are trading on a discount  to net asset value (NAV) narrower than their 12-month average discount figure.

In fact, a couple of UK trusts run by fund managers who follow an investment discipline based on hunting for shares that have been mispriced by the market, are trading on small premiums to NAV: Fidelity Special Values (LSE:FSV) (2.3%) and Temple Bar (LSE:TMPL) (0.9%).

Smaller company-focused trusts have also seen their discounts narrow in recent weeks, and as a result BlackRock Throgmorton Trust (LSE:THRG) (3.1%), Invesco Perpetual UK Smaller (LSE:IPU) (1.7%) and BlackRock UK Smaller Companies (1.5%) all command a premium. 

There is one UK trust bucking the trend in terms of trading on a discount wider than its 12-month average – Schroder UK Public Private (LSE:WPCT) (formerly Woodford Patient Capital Trust). The discount is 33.1%, wider than its 12-month average discount figure of 28%. Time will tell whether Schroders (which has only just taken over management of the trust) can turn performance around, but the current discount reflects the predicament the trust finds itself in.

One risk to bear in mind, as Money Observer has previously noted, is the potential for additional reductions to be made to the trust’s net asset value. 

Therefore, UK investors need to cast their nets wider to find investment trust bargain opportunities. The trouble is that on the back of a strong year overall for the majority of major stock markets, value opportunities are thin on the ground.

Three trusts  stand out in terms of looking ‘cheap’: Mobius Investment Trust (LSE:MMIT), Pacific Assets (LSE:PAC) and JPMorgan European Income (LSE:JETI).

Mobius Investment Trust looks the biggest bargain of the trio, available on a 11.3% discount. Over the past year the trust has typically traded on a discount of 1.2%. The widening of the discount and disappointing performance in terms of its holdings (with its NAV declining 1.8% over the past year) has led its share price to decline by 8.4% on a one-year view. This places the trust in the bottom quartile of its sector – global emerging markets – over the period.  

Pacific Assets’ discount is smaller, at 2.9%, but is worthy of a mention considering this is wider than its 12-month average discount figure of 0.1%.  It is the only regional trust that has continued to totally avoid direct investment in China and has long been massively overweight India. 

Recent performance, though, has been poor, with the trust losing 1.1% in share price terms over the past year. In contrast, the average Asia Pacific investment trust returned 12.3%.

Last but not least, JPM European – Income is trading on a discount of 15.2%, wider than its 12-month average discount figure of 12.8%. This, again, is a reflection of performance of late lagging rival trusts.

Its share price rose 14.1% over the past year against 20.8% for the IT Europe sector. This has been a Money Observer Rated Fund since 2015. 

Please note all discount figures were sourced from Winterflood on 31 December 2019.