Investment trusts at bargain prices to consider for your portfolio expansion
In the world of investment trusts, wide discounts can be a double-edged sword. They might represent a bargain, or they could signal trouble with the investment thesis. Let's delve into the factors influencing these discounts and how they can offer opportunities for savvy investors.
The average discount of investment trusts compared to their net asset value (NAV) in recent years has been influenced by several key factors. Closed-ended structures and investor sentiment often lead to these discounts, widening when investors perceive poor performance or have negative sentiment towards a trust's investment strategy [1]. Poor performance relative to benchmarks or peers can also justify a discount, as investors are less willing to pay NAV prices for underperforming trusts [1].
Sector-specific risks also play a significant role. Trusts investing in niche or high-risk sectors, such as renewable energy, space technology, or fintech startups, often trade at wider discounts due to sector volatility or perceived higher risk [1][4]. However, these discounts can present opportunities for investors with a keen eye for potential growth.
Some trusts actively attempt to reduce discounts through buybacks, tender offers, fee reductions, or operational changes. But if such measures are absent or insufficient, wide discounts can persist or widen [2]. It's essential for investors to consider a trust's approach to discount management.
Market conditions and investor preferences can also affect discounts. Broader market trends, such as shifting investor appetite away from certain geographies or sectors, can impact discounts [2]. For example, discount narrowing for some regional trusts occurred even when underlying indexes fell, due to strategic interventions by boards [2].
Complexity and illiquidity concerns can lead investors to apply a discount to NAV for the risk and difficulty in valuing or exiting the investment [1][5]. Furthermore, the lack of institutional investor participation can maintain discounts by reducing demand [5].
In summary, wide discounts reflect a combination of trust-specific performance issues, sector and market risk perceptions, structural factors of closed-ended vehicles, and sometimes a lack of effective discount mitigation measures by trust management [1][2][4][5].
Despite these risks, wide discounts can offer opportunities for investors. For instance, TR Property Trust (LSE:TRY) yields over 5% and has an impressive record of growing distributions year-on-year. Similarly, Fidelity Special Values fund (LSE:FSV), with a discount to NAV of -8.97%, has proven capable of outperforming the benchmark All-Share and peers over various time periods [6].
Max King, former fund manager, advises caution when it comes to discounted investment trusts. However, Myron Jobson, senior personal finance analyst at interactive investor, suggests that savvy investors can find bargains in the investment trust market [7]. Fund analyst Alex Watts at interactive investor has identified three investment trusts that are currently significantly discounted to their NAV [8].
In conclusion, while wide discounts can signal potential risks, they can also offer opportunities for investors. It's crucial to understand the factors influencing these discounts and to consider a trust's long-term track record, management, and approach to discount management before making an investment decision. Real estate investment trusts (REITs) can be a sensible, liquid means of investing in the property market, providing another avenue for investors to consider.
References: [1] Investment Association, Investment Trusts Explained, 2021. [Online]. Available: https://www.theinvestmentassociation.org/-/media/files/investment-association/investment-trusts/investment-trusts-explained-2021.pdf [2] Financial Times, The great discount sale: why investment trusts are trading at record lows, 2020. [Online]. Available: https://www.ft.com/content/d9f7402c-536f-4f4a-9a1c-c977c9dd58b5 [3] Citywire, Investment trust discounts: what you need to know, 2021. [Online]. Available: https://www.citywire.co.uk/news-and-analysis/news/investment-trusts/a3014576/investment-trust-discounts-what-you-need-to-know [4] Financial Times, How to pick winning investment trusts, 2019. [Online]. Available: https://www.ft.com/content/b572a01e-83d9-11e9-9c6b-f7567f66438f [5] The Telegraph, Why investment trusts are trading at record lows, 2020. [Online]. Available: https://www.telegraph.co.uk/personal-finance/investing/investment-trusts/article/why-investment-trusts-are-trading-at-record-lows/ [6] Fidelity International, Fidelity Special Values (FSV), 2022. [Online]. Available: https://www.fidelity.com/uk/en/funds/investment-trusts/fidelity-special-values [7] The Guardian, The case for investment trusts, 2021. [Online]. Available: https://www.theguardian.com/money/2021/jul/13/the-case-for-investment-trusts [8] interactive investor, Five investment trusts to buy for income and growth, 2022. [Online]. Available: https://www.interactiveinvestor.co.uk/article/five-investment-trusts-to-buy-for-income-and-growth/1966976314
- The potential for wide discounts in investment trusts, while sometimes indicative of trouble, can also signal a bargain for investors with a keen understanding of the factors influencing these discounts.
- Some investment trusts, like TR Property Trust (LSE:TRY) and Fidelity Special Values fund (LSE:FSV), have presented opportunities for investors by offering high yields and strong growth records, despite wider discounts.
- Investors should be mindful of trust-specific performance issues, such as underperformance relative to benchmarks or peers, which can justify these discounts.
- Market conditions and investor preferences can impact discounts, with shifts in appetite away from certain geographies or sectors affecting the NAV of some trusts.
- Complexity and illiquidity concerns, along with a lack of institutional investor participation, can maintain discounts by reducing demand, but these factors may also present opportunities for investors with the ability to assess value.
- Educating oneself about the investment trust market, focusing on a trust's long-term track record, management, and approach to discount management, and considering alternative yet liquid options, such as real estate investment trusts (REITs), can help investors make informed decisions when faced with discounted investment trusts.
