Q3 2022 Discounts Everywhere - Photo by Artem Beliaikin on Unsplash

Q3 2022 Review: Discounts Everywhere

Here’s my portfolio review for the third quarter of 2022. I’m down 15% for the year with many of my holdings trading at what look like very wide discounts.

My performance

Here’s how my portfolio is doing measured against a range of comparators:

Portfolio / comparatorsUp to
Q3 2022
FY 2021Annualised
since
Jan 2018
My portfolio-15.1%+16.2%+6.0%
Vanguard FTSE Global All Cap (fund)-9.7%+18.9%+7.4%
Vanguard LifeStrategy 60 (fund)-13.3%+9.9%+2.9%
Vanguard UK All-Share Index (fund)-7.9%+18.2%+1.1%
FTSE All-Share Equity Investment Trusts (index)-20.0%+12.8%+4.8%

Notes: I use the Vanguard global tracker fund as my main benchmark and I have a stretch target of beating it by 2-3% per annum over the long term. The more conservative LifeStrategy 60 fund (a global 60% equity/40% bond portfolio), a UK index tracking fund, and an index of UK investment trusts provide additional reference points. All returns are measured in sterling using a unitised method for my portfolio that adjusts for any new money put in or any withdrawals. All trading and admin costs I incur are included in my portfolio returns but no such costs are included in the comparator fund returns.

The strength of the dollar has meant global trackers measured in sterling are (still) holding up surprisingly well despite events in Ukraine, the surging rate of inflation, and rising bond rates. The last few weeks did see the pound fall against other major currencies, due to concerns about the Mini Budget, but it has since recovered somewhat. As this long-term chart shows, the pound is essentially unchanged since the end of 2008 but it’s way below the level it enjoyed before the financial crisis.

The tough year for bonds has continued with the 60/40 fund down more than global equity markets. The flip side of that is, as bond rates have risen so much, the prospects for future returns now look much better.

The UK market continues to hold up relatively well but there’s a big difference between the FTSE 100 (down 4%), the 250 (down 25%), the SmallCap (down 19%), and the AIM All-Share (down 27%). If your UK weighting is tilted towards smaller stocks, as mine is, that’s made things difficult.

My portfolio was up 2% in the third quarter, so I am still behind global markets but ahead of the FT index of investment trusts. Like most folks, I saw a recovery in July and the first half of August but those gains then ebbed away.

My rolling annual return as I come up to the five-year mark of posting my numbers on this blog is 6.0% versus 7.4% for global markets.

My performance by holding

Here’s how my individual positions did on a share price and NAV basis along with their current rating. The column headers should be sortable although they might not be on some mobile devices.

HoldingShare
price
YTD
Net asset
value
YTD
Premium/
(discount)
Gresham House Energy Storage+32.4%+29.3%+14.7%
Bluefield Solar Income+17.2%+19.8%-1.1%
HICL Infrastructure-5.2%+9.1%-1.0%
HgCapital-17.6%+2.2%-23.2%
JPMorgan Global Growth & Income-9.7%-5.4%-1.2%
Vanguard All-World ETF-9.6%n/an/a
Lindsell Train Global-4.1%n/an/a
Fundsmith Equity-14.9%n/an/a
Smithson-41.6%-32.5%-11.0%
RIT Capital Partners-23.8%-9.1%-17.6%
Keystone Positive Change-37.8%-29.2%-13.5%
Bellevue Healthcare-12.8%-6.8%-4.1%
Worldwide Healthcare-7.5%-1.3%-7.2%
International Biotechnology-9.7%-4.0%-5.6%
Baronsmead Venture-11.0%-13.2%-4.3%
Henderson Smaller Companies-40.9%-38.5%-13.9%
BlackRock Smaller Companies-41.6%-34.0%-14.3%
KR1-65.0%-54.3%-36.7%

There are plenty of trusts on huge discounts at the moment across the whole sector. Nearly all of my holdings are on a wider discount (or a smaller premium) than they were at the start of the year.

I reckon the average discount across my whole portfolio is 4.5% (that includes Fundsmith, Lindsell Train, and the Vanguard All-World ETF which all trade at par because they are open-ended funds or ETFs). It was a 1% premium at the start of the year so that’s quite a swing.

I don’t have up-to-date figures for the wider investment trust sector but I think the average discount has gone from around 2% to the low teens. I would expect to see some snapback on discounts when markets do eventually settle into a more normal pattern but, as I noted in my last review, they may not get back to the very low levels they were at the start of this year.

If you have RNS email alerts set up, no doubt your inbox fills up every afternoon with “Transaction in Own Shares” announcements. Some trusts have been better at buybacks than others of course. A few only do them when their discount looks especially wide compared to the rest of their sector. But because nearly every discount has widened, they have sat on their hands despite the obvious benefit to shareholders.

Here are some quick thoughts on my  individual holdings:


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Gresham House Energy Storage has been a standout this year, not only delivering a large increase in NAV as projects move from construction into operation but seeing its premium move higher as well. I think it was one of the first renewable trusts to signal what its next likely NAV figure would be — now they’re all at it. I’m considering top-slicing this position as it has done so well although renewables are only going to become a bigger part of our energy mix and the battery capacity to cope with such a change is still way behind where it needs to be.

Bluefield Solar posted a big NAV increase for the second quarter of this year but it has gone from a premium to a discount as there’s some uncertainty about the likely level of pricing for the proposed long-term contracts for renewables. This trust has been very active on the acquisition front over the last year so I wouldn’t be surprised if it paused for a breather. It seems to have its near-term expansion plans well-funded and the higher power price agreements it’s been able to agree in the past year should provide some additional cash flow that can be used if it can’t get an equity fundraising away.

HICL trundles on in a sedate but generally reassuring fashion. It’s been notably more acquisitive in recent months, moving into digital infrastructure. Due to its size, though, it takes a while for any changes in its portfolio to become meaningful. I’ve been profiling some other infrastructure trusts at Money Makers in recent weeks (BBGI and 3i Infrastructure) and they’ve looked impressive. If I was to add a new holding to my portfolio, it could well come from this sector. Pantheon Infrastructure looks interesting, too, although it’s only just assembled its initial portfolio so it has no track record that can be assessed. It recently pulled its plans to raise £250m via a C share issue so that could crimp its near-term expansion plans. Both the renewables and infrastructure sectors have slid on discount rate concerns in the last couple of weeks but that seems a little overdone to me as there are other factors that could increase NAVs as well.

HgCapital posted a surprisingly strong 30 June NAV figure, saying that the ratings for dull and profitable tech companies have been holding up a lot better than trendy and unprofitable ones. It also had a few refinancings and disposals that were ahead of book value. It even increased its interim dividend from 2.0p to 2.5p, which I wasn’t expecting. Investors are still treating the private equity sector with extreme caution and Hg’s discount looks tiny compared to the 40%+ discounts at some other trusts in this space.

Lindsell Train Global is winning the battle of the quality growth funds this year and even snuck into the black during August. Fundsmith Equity has been a little more active on the trading front this year so that’s something to keep half an eye on to see if it persists. I noticed that Blue Whale, a similar quality-style fund, turned five last month and all three of these vehicles now have very similar returns over that time period. Lindsell Train was lagging the other two for a while but has regained much of that ground.

Smithson has become a regular buyer of its own shares although not to the same feverish extent it was issuing them when it was at a premium. It might come under increasing scrutiny now that Fundsmith Emerging Equities (FEET) has decided to wind itself up. Both FEET and Smithson say they intend to hold continuation votes if their average discounts are wider than 10% for a calendar year. FEET would have fallen foul of that for 2022, which is perhaps why Terry Smith pulled the plug when he did. Smithson should be fine for 2022 but 2023 might be a different story. I’m sitting put with Smithson for now as I’m happy with its basic strategy but the way the FEET saga played out did reinforce the point that the directors on this trust may not be quite as independent as I would like.

Nothing much has changed with respect to my three biotech/healthcare trusts, namely Worldwide Healthcare, International Biotechnology, and Bellevue. They tumbled early in the year but have held up fairly well overall. I’ve nibbled away when one of their discounts has widened out to an offensive degree. Their average NAV performance this year has been -4%, highlighting the defensive nature of this sector.

JPMorgan Global Growth & Income finally completed its merger with Scottish Investment Trust last month. I suspect some holders of the latter have taken the opportunity to sell out as its small premium has become a small discount, although it could be partly due to the malaise affecting most trusts this year. Its NAV performance has been decent and it decided to raise its annual dividend a smidgen.

Keystone Positive Change had a very strong July but has lost ground again in the last two months. It continues to do a little better than most other Baillie Gifford trusts with global mandates (which is not that difficult of course) so I’m happy to remain patient here although a couple of its portfolio choices have looked a little rash.

RIT Capital Partners is another trust that started doing buybacks as its discount widened. Both Henderson Smaller and BlackRock Smaller are yet to do so although with their discounts being around 15% you would have thought the case for doing so is pretty clear.

Baronsmead Venture remains my second smallest position and by the end of this year, most of my holding will have passed the five-year point, meaning I can sell it without losing the income tax rebate received on purchase. That might spur me into doing something with this position although I will probably wait until I’ve tidied up my other taxable positions first.

Crypto plaything KR1 remains my smallest position. Despite my IR concerns (mostly belated reporting of results and no monthly or quarterly updates), I have to admit I was tempted to top up when it dipped below 30p in June and July. Naturally, it rebounded to 60p within a month just to spite me. It’s drifted back down again, though, so it’s become a candidate for a nibble once more.

My trading

So far in 2022, I have added small amounts to HgCapital, Bellevue Healthcare, Bluefield Solar Income, Henderson Smaller, Smithson, Worldwide Healthcare, BlackRock Smaller, International Biotechnology, Keystone Positive Change, Lindsell Train Global, KR1, and the Vanguard All-World ETF. Most of this has been reinvesting dividends I have received.

I sold a little HICL earlier in the year but then bought some in July when there was a fundraising offer. I also reduced my position in JPMorgan Global Growth & Income back in March as part of an ongoing process to tidy up my remaining taxable positions. I haven’t done anything this year with Fundsmith,  Baronsmead Venture, RIT, or Gresham House Energy Storage.

I reckon my portfolio turnover has been 2% although that could increase a bit by the end of the year if I do top-slice Gresham House Energy Storage. My turnover was 5% in 2019, 9% in 2020, and 7% in 2021 so it does tend to be very low compared to most investors.

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As always, thank you for reading!

   

Disclaimer

Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

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4 Replies to “Q3 2022 Review: Discounts Everywhere”

  1. Phew – what a year.

    Curious if you’ve considered switching from Lindsell Global to Lindsell IT, given the latter is now at a discount (perhaps this will endure for a while, but it certainly still feels like a novelty). It’s been a rough few years, but the real long-term holders have still done pretty well. I suppose I think that what’s good for Lindsell Global should be good for Lindsell IT.

    Smithson v disappointing – at the start of the year I was planning to have it as a top holding – I’m not sure exactly what triggered my loss of confidence… Partly my feeling that it should be more US-based like the Parent fund. Partly my lack of conviction in the manager – this may be very unfair, but the reports read like a robot programmed in ‘Fundsmith language’, which is not a terrible thing by any means, but I’m still looking for someone with real independent thought. Partly my questioning of some of the Buy decisions e.g. Fevertree (Lindsell started buying when it was much cheaper – though even they could have waited), wasn’t convinced by Wingstop or Rollins. I think the initial portfolio was very strong, but at this point would choose a US Growth tracker over this for the ‘Growth part’ of a portfolio.

    KR1 is fascinating – it seems pretty much the best of a bad bunch for Crypto (especially in the UK) & at a hefty discount. Druckenmiller suggested, not unobviously he expects high correlation between Crypto & Nasdaq, so I see KR1 as potentially a way to get highly geared Growth exposure. Liquidity not great, is it? But maybe one to drip into gradually, with the assumption it will go down quite a bit for a while yet.

    Good luck for Q4!

  2. Hey Tom,

    Will probably stick with LT Global for the time being but I could add a little LTIT as a side-bet if the discount widens out beyond 10%. The heavy weighting in the asset management business and the fact the rating moves around so much make it a different animal in my view.

    Agree that a lot of the gloss has come off at SSON. I tend to be quite relaxed about individual buys as in a portfolio of 30 or so stocks, there are always going to be a few I think look less attractive. Since the IPO, they have added 9 stocks and sold 6 (Wingstop in both columns) so I wouldn’t say it has changed that massively in the last four years. Definitely watching it a lot closer to see what it all looks like once we come back into more normal market conditions (if there is such a thing!).

    I haven’t had any particular issues with KR1 liquidity but I have only bought small amounts so far and, more importantly, not tried to sell any!

  3. Hi,
    Thanks a lot for your very interesting reviews and sharing.

    I have considered to add HGT to my portfolio, however, i am not comfortable at all with the ” artificial” substantial multiple expansion embedded in the valuations and its substantial increase over the last years (Sept-22: 28.8x EV/EBITDA/Dec-2021: 27.4x EV/EBITDA/Dec-2020:22.1x EV/EBITDA, Dec-2019: 19.8x EV/EBITDA). There is a substantial uptrend in the EV/EBITDA multiples between 2020 and 2022, which the latter does not even seem to be supported by comparable/listed companies (e.g. Nasdaq performance in 2022) and transaction multiples which have dropped in the course of 2022.

    Should the Sept-22 multiples be adjusted to Dec-20 or Dec-19 the HGT valuation would substantially drop by c. 30-40% (depending on net/debt levels which seem to have been increaseing over the period from 2020 to 2022). I’m looking forward to see HGT annual report for 2022 to see the EV/EBITDA multiple that they will use to derive the NAV. Very curious to see how can they justify such a high comparable/listed multiples given the uderperformance of the tech sector/Nasdaq in 2022.

    What are your thoughts on the above? Is this is a concern on your assessment of HGT? If so, how did you get comfortable with the very high multiples to derive the NAV of the trust?

    Thanks a lot in advance for sharing your thoughts.
    Best,
    Sergio

  4. Good question Sergio. It’s definitely something that I am watching closely and it has caused me some concern as well (the profit multiple more than the debt multiple although I would like to see the latter come down too of course).

    HGT reckon the underlying multiples they use came down by between 10% and 15% in Q3 although the portfolio mix (a higher valuation for Access for the most part) saw the average weighted multiple actually increase. They also make the point that the multiples for comparable listed companies in the duller and more profitable software sub-sectors that they are invested in have come down less than the NASDAQ average. Then there is also the fact that the shares have moved from a small premium to a 20% discount and that sales and refinancings (although there are fewer than normal) are still being done at a fairly healthy premium to carrying values. Lastly, both sales and profit growth rates seem to be holding up pretty well at 31% and 26/27% throughout 2022.

    Even with all those factors, I wouldn’t say I am entirely comfortable given it is one of my larger positions. That said, I added slightly to my position earlier this year (at around 360p I think) although it was a very small top-up.

    As well as an overall multiple reduction, if there is a specific issue at either Access or Visma (15% and 11% of NAV respectively) that would hit the shares pretty hard I suspect.

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