Edinburgh Investment Trust is currently trading at an attractive discount after a challenging 12 months, while TR Property Investment Trust is looking more expensive, according to stockbroker Killik & Co.
Investment companies differ to their open-ended counterparts in that investors not only need to be aware of performance but also of the premium or discount that their shares trade on.
Trusts trading at discounts can often be an attractive entry point for investors, while those trading on premiums can offer a good opportunity for investors to realise returns.
Below, Killik & Co highlights two closed-end funds that at current valuations they believe are particularly expensive or attractive from a discount perspective against the peer group.
“We regularly screen for instances where these discounts become unduly wide or narrow (or where premiums develop) and do not adequately reflect the short-term risks to performance or opportunities to make gains,” the firm noted.
Edinburgh Investment Trust – Attractive
The company that looks most attractive based on its current valuation is the £1.3bn Edinburgh Investment Trust run by FE Alpha Manager Mark Barnett.
The trust has underperformed in the short-term, losing 27 basis points over the last six months and 5.51 percentage points in the last three months.
It has returned 2 per cent over the last 12 months, the second lowest in the IT UK Equity Income sector, as the below chart shows.
Performance of trust vs sector and benchmark over 1yr
Source: FE Analytics
“The portfolio’s positioning and a number of stock specific issues has caused it to underperform the benchmark index over the last 12 months,” analysts at Killik & Co wrote.
The four FE Crown-rated investment trust invests primarily in UK securities (with up to 20 per cent overseas) and aims to increase NAV in excess of the FTSE All Share index and grow dividends in excess of the rate of UK inflation over the long-term.
Barnett is cautiously positioned, Killik said, noting that while corporate earnings growth in 2017 look good for a number of sectors in the UK equity market, the manager remains concerned that the benefit of weakened sterling has been largely accounted for and that too many risks are not priced into equities.
“The manager is sceptical of the need to raise rates aggressively in the short term, principally due to the absence of a strong backdrop of sustainably higher levels of inflation,” Killik analysts noted.
“The aim is therefore to invest, with sensible diversification, in companies with the prospect of making money in absolute terms, either driven by growing dividends or from companies that can improve or transform their financial prospects regardless of the shifting economic weather.”
However, the share price has exaggerated this underperformance and lagged that of the NAV year-to-date.
This has caused the discount to widen to 9 per cent, which is towards the bottom-end of the medium-term discount range and wider than the IT UK Equity Income sector’s average discount of 4 per cent.
Trust premium/discount history over 5yrs
Source: Killik & Co
“The long-term track record of the manager remains strong and the shares continue to yield an attractive 3.6 per cent which was well covered by earnings in the last financial year (1.1 times), with the trust’s revenue reserves also accounting for 1.5 years of dividend payment,” they added.
Edinburgh Investment Trust is 13 per cent geared and has ongoing charges of 0.6 per cent, according to the latest figures from the Association of Investment Companies (AIC).
TR Property Investment Trust – Expensive
Conversely, the investment company that is looking a bit expensive relative to its history is the £1.1bn TR Property Investment Trust run by Marcus Phayre-Mudge.
The trust invests in a pan-European portfolio of shares and securities of property companies and property-related businesses and also in direct investment property located in the UK.
The portfolio is currently 36 per cent weighted to investments in the UK with 71 per cent in continental Europe while its direct property portfolio currently stands at 8 per cent.
Phayre-Mudge of Thames River Capital has managed the portfolio since April 2011 and been part of the fund management team since 1997.
The fund has a strong track record of outperformance against its FTSE EPRA/NAREIT Developed Europe Total Return benchmark, Killik noted.
“The trust offers a historic dividend yield of 2.8 per cent (fully covered by earnings over the last financial period) and continues to offer diverse exposure to UK and European property assets,” the research company noted.
“However, the share price discount has narrowed materially over the last year.”
Performance of trust over 3yrs
Source: FE Analytics
The shares sold off following the Brexit vote last June and was trading at a high-teens discount but this has since narrowed to a low single-digit discount.
“This rating is towards the top end of the long-term range and with the strategy offering two levels of leverage on the underlying property assets we would suggest profit taking,” the analysts wrote.
TR Property Investment Trust is 16 per cent geared and has ongoing charges of 0.87 per cent including performance fees, according to the AIC.