Investment trust discounts and premiums have become much tighter in recent years as boards have placed more emphasis on share price control.
It means that while investment trusts may look cheap or expensive relative to their peers, investors may want to pay closer attention to where the current level relates to a company’s history.
“Attitudes to discount control mechanisms have changed over the years, so many trusts aren’t trading on tighter discounts now than over a 20-year average because of market valuation, it will be more because boards have been more willing to buy back shares than in the past,” said Kepler Trust Intelligence research analyst Alex Paget.
This is particularly visible in the IT UK Equity Income sector where, despite a particularly challenging 2016, many of the trusts’ discounts or premiums remain very close to their long-term average.
Performance of sector vs benchmark in 2016
Source: FE Analytics
Indeed, the sector underperformed the FTSE All Share by 9.86 percentage points last year, with only one trust outperforming the benchmark index during 2016.
Below, FE Trustnet looks at how this has affected the premium/discount of trusts in the sector. 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, Global and UK Smaller Companies sectors and in an upcoming article we will look at other regional sectors.
The trust on the largest discount relative to its history is the £103m Shires Income trust, run by Ed Beal.
It uses both fixed income and equities to generate returns for investors and therefore has a 49.2 per cent weighting to the financials sector.
The trust is built to withstand macroeconomic uncertainty with the manager noting in his latest factsheet: “As ever, we believe that the portfolio is comprised of business that although not immune to the external environment will be able to navigate the difficulties that may lie ahead.”
The investment company is 6.17 percentage points cheaper than its long-term average, at its current 9.34 per cent discount, and 6.84 percentage points less than its five-year average of 2.5 per cent.
This is despite a strong performance over the last 18 months, with the trust the third best performer in the sector last year and the best performer so far year-to-date.
However, it struggled in 2015 when the company lost 11.31 per cent – the lowest in the sector – compared to a positive return of 0.98 per cent for the FTSE All Share benchmark.
The trust has a yield of 4.8 per cent and ongoing charges of 1.04 per cent, according to the latest data from the Association of Investment Companies (AIC).
The trust on the second largest discount relative to its history is the £1.1bn Perpetual Income & Growth run by FE Alpha Manager Mark Barnett.
List of IT UK Equity Income trusts’ discount/premium vs their history
Source: Kepler Trust Intelligence
The trust is on a discount of around 8.37 per cent, 4.55 percentage points wider than its long-term average of 3.82 per cent and 6.97 percentage points ahead of its five year average.
Analysts at Winterflood Investment Trusts noted: “Mark Barnett adopts an active, unconstrained approach to investing in UK equities and seeks to achieve absolute returns with little regard to benchmark weightings.
“While performance over the last year has been negatively impacted by a lack of exposure to basic materials and stock specific issues, the fund’s longer‐term performance relative to both the FTSE All Share index and the UK equity income peer group average remains strong.”
Indeed, the trust has been a bottom quartile performer over one- and three-year periods, but has been a top quartile performer over the past decade.
As well as its recent performance, Winterflood said, the discount has been impacted by the decision to move its savings plan to The Share Centre, which resulted in a degree of selling.
However, the investment trust research house noted that current share price valuation represented a “compelling entry point” and continued to recommend the fund within the UK equities component of its model portfolio.
The trust has a yield of 3.4 per cent and charges of 0.65 per cent according to data from the AIC.
At the other end of the spectrum, Finsbury Growth & Income is the trust with the biggest positive difference between its current premium and long-term average.
The five crown-rated trust is on a 0.62 per cent premium, compared to a long-term average discount of a 4.48 per cent discount, though it is actually below its five-year average of a 1.1 per cent premium.
Analysts at Kepler Trust Intelligence noted: “The trust has a rigorous discount control mechanism, which means that the shares trade between a 5 per cent discount and a modest premium of 2 per cent, more often than not in positive territory.
“The board buys back shares at around 5 per cent and holds them in treasury.”
The £1.2bn trust, run by FE Alpha Manager Nick Train, has been a consistent performer sitting in the top quartile of the IT UK Equity Income sector over three, five and 10 years.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
According to the AIC, the trust has a dividend yield of 1.7 per cent and ongoing charges of 0.74 per cent.
Also of note from the above list are Mark Barnett’s Edinburgh Investment Trust and Thomas Moore’s Standard Life Equity Income.
Despite both sitting on discounts of around 5 per cent, Edinburgh is 3.35 percentage points above its long-term average while the Standard Life trust is 89 basis points below its long-term average.
Yet, over a more recent time period both trusts are 3.67 and 3.48 percentage points wider than their five-year average respectively.
Barnett took over the Edinburgh trust in 2014 from fellow FE Alpha Manager Neil Woodford, with the trust’s discount widening shortly after he became manager.
Analysts at Kepler noted: “By the end of 2015, it appeared that the market had got comfortable with Mark as the new manager, and the shares once again traded at a premium rating.
“Since the Brexit vote however, and in common with many other UK equity income trusts, confidence has waned somewhat, and the trust has been consistently trading on a moderate discount.”
The £1.7bn Edinburgh Investment has a yield of 3.4 per cent and charges of 0.6 per cent, according to the AIC.
Moore took over the Standard Life fund in 2011 from Karen Robertson, who had been in charge since its launch in 2005.
The trust’s discount widened considerably last year in particular as the fund struggled to keep up with the rotations in sector and style biases.
“Its poor NAV returns in 2016 as well as weak sentiment towards the UK equity market played their part and, as such, while NAV losses were 3.3 per cent last year, investors witnessed share price losses of more than 10 per cent,” Kepler noted.
Data from the AIC shows that the £263m Standard Life Equity Income fund offers a yield of 3.6 per cent and charges of 0.96 per cent.