The headline discount/premium of an investment trust can be misleading for investors, particularly in the IT UK Smaller Companies sector where stocks tend to be more volatile.
Exactly half of the trusts in the sector are on tighter discounts compared with their long-term average and half are on wider discounts, according to the latest data from Kepler Trust Intelligence, though this does not tell the full picture.
The last 18 months have been a turbulent time for smaller companies, with uncertainty surrounding Brexit hitting the more domestically-focused businesses last year.
Indeed in 2016, the FTSE Small Cap excluding investment trusts index underperformed the FTSE 100 by 6.53 percentage, points as the below shows.
Performance of indices in 2016
Source: FE Analytics
Investors shied away from smaller companies in favour of the larger dollar earners typically found in the FTSE 100 as sterling slumped.
Meanwhile, concerns over the domestic economy, with consumption forecast to fall as inflation re-entered the system, affected many of the more domestic names found further down the market cap spectrum.
With these effects much less pronounced than expected, this year the sector has got back on track with the FTSE Small Cap ex ITs index outperforming the FTSE 100 by 4.98 percentage points.
As such, FE Trustnet looks at where some of the UK smaller companies investment trusts’ current share price discounts and premiums sit relative to their history.
In this study we have compared the current premium or discount to a trust’s 20-year average. Where a trust does not have a long enough track record we have compared it since launch.
Previously we tackled the IT UK All Companies sector and in an upcoming article we will look at the IT UK Equity Income sector.
The trust on the largest premium compared to its longer term average is Invesco Perpetual UK Smaller, run by Jonathan Brown.
The £160m investment company, which was launched in 1988 and has been run by Brown since 2002, is currently on a 5.95 per cent discount.
This is in contrast to its 20-year average discount of 15.15 per cent, making it 9.20 percentage points narrower than its long-term history. However, it is just 3.13 percentage points tighter than its five-year average of 9 per cent.
The discount tightened significantly in 2015 after the board announced steps to increase the dividend by distributing 100 per cent of available income each year through the payment of a small proportion from capital profits.
As such, the four FE Crown-rated trust has a yield of 3.5 per cent, according to the latest data from the AIC. It has ongoing charges of 0.78 per cent.
Since March 2015 when the board announced these changes, the trust has been a top quartile performer, returning 63 per cent – 9.12 percentage points ahead of the sector average and double the Numis Smaller Companies ex IT index.
List of IT UK Smaller Companies discount/premium vs their history
Source: Kepler Trust Intelligence
Another trust on a significantly narrower discount compared to its long-term average is Standard Life UK Smaller Companies Trust, run by FE Alpha Manager Harry Nimmo.
Nimmo’s investment process uses Standard Life’s Matrix, a quant-based screening system that highlights high-quality businesses with a competitive advantage which should lead to consistent and sustainable earnings growth.
The manager has been in charge of the investment company, which launched in 1993, since 2003 when management moved from Edinburgh Fund Managers to Standard Life Investments.
Over the last 20 years the fund has averaged a discount of 13.91 per cent, though it is currently on a discount of 6.44 per cent, 7.47 percentage points less than the average.
However this is wider than its five-year average and just 0.64 percentage points away from its 10-year average.
Kepler Trust Intelligence analysts noted: “The board aims to buy back shares if the discount widens past 8 per cent.
“This is still wider than the trust's five-year average and given it has tended to deliver its relative outperformance in flat or falling markets over the years - so it isn’t a high beta offering that is sensitive to sentiment-driven index movements - we think investors are still offered an attractive entry point at these levels,” they added.
Sandwiched in between the two above trusts in the table is Gresham House Strategic, which is on a large discount relative to its sector but is on a narrower discount to its history.
The £32m trust paid out its maiden dividend this year of 15p and bought back almost £900,000 in shares at 15p this year.
The wide discount over its history is narrower when compared to its five-year average of 19.2 per cent as the trust, which was launched in 1999, has begun a turnaround strategy including investing in unlisted companies as well as micro-caps.
At the other end of the spectrum, Miton UK Microcap is on the widest discount relative to its ‘long-term’ history.
Despite being one of only five trusts in the sector not on a double-digit discount (currently a 5.88 per cent discount), the trust has averaged a 1.59 per cent premium over the longer term – though it was launched in 2015 giving it a relatively short history.
The £103.5m trust has been run by Gervais Williams and FE Alpha Manager Martin Turner since its launch, during which time it has been the second worst performer in the sector, returning 17.78 per cent.
List of IT UK Smaller Companies discount/premium vs their history
Source: FE Analytics
In its latest factsheet, the managers said: “The strategy of the trust is distinct in focusing on micro-cap companies with a value bias and so the performance is likely to vary from time to time compared to other trusts in the smaller companies sector.”
Another trust of note is the £1.2bn Aberforth Smaller Companies, run by Alistair Whyte and Richard Newbery since its launch in 1990 with Euan Macdonald added in 2001 and Keith Muir in 2011. Two other managers were added in 2016.
Over the last 20 years the trust has been on an average discount of 11.07 per cent and it currently sits at 12.4 per cent.
“The trust’s discount has been somewhat volatile, ranging from over 18 per cent to as low as 2 per cent over the last three years, following the fortunes of the trust itself, and moving in when the board buys back shares – which it has done actively,” analysts at Kepler Trust Intelligence said.
“The board has the right to buy back up to 15 per cent of total shares in issue, and has shown itself willing to protect the discount, spending £6.5m on buybacks in 2016.”