Most trust investors will be aware that discounts have widened significantly since the start of this year but the latest press release from the AIC puts it into perspective.
The raw stats are that the average discount has gone from 3.6% to 14.3%, an increase of 10.7 percentage points and pretty much the widest level they have been since the financial crisis apart from a short-lived spike down below 20% during the initial COVID crash.
The FTSE Closed End Index is down around 15% this year, so you could argue that around two-thirds of this is due to widening discounts with the remainder being down to a fall in net asset values.
Some sectors have been savaged
As is often the case, when you look at individual sectors and trusts, there are wide variations. The AIC has done the legwork and looked at how sector discounts have moved over the course of 2022. These figures are a weighted average based on market capitalisation so the discounts of the largest trusts like Scottish Mortgage, 3i, and Pershing Square matter much more than the tiddlers.
The list is split into equities and alternatives but it ignores sectors where there are only one or two trusts. That means about 20 out of 330 trusts are excluded from the sector analysis, the largest being Hipgnosis Songs, TR Property, Target Healthcare REIT, Impact Healthcare REIT, Polar Capital Global Financials, and Round Hill Music. These have all seen their discounts widen I believe, quite significantly in some cases, and there are included in the average figures for all trusts.
I’ve made the two tables sortable so you can play around with the numbers if you like.
Equity sectors
| Sector | Discount on 18 Nov 2022 (%) | Discount on 31 Dec 2021 (%) | Change since 31 Dec 2021 (% pts) |
|---|---|---|---|
| All sectors | -14.3 | -3.6 | -10.7 |
| North America | -26.5 | -21.1 | -5.4 |
| India | -14.9 | -12.9 | -2.0 |
| Global Emerging Markets | -12.4 | -8.7 | -3.7 |
| Commodities & Natural Resources | -12.0 | -16.9 | 4.9 |
| Asia Pacific Smaller Companies | -11.9 | -8.8 | -3.1 |
| Global Smaller Companies | -11.5 | -3.8 | -7.8 |
| Country Specialist | -11.1 | -18.3 | 7.2 |
| China / Greater China | -10.9 | -3.4 | -7.5 |
| UK Smaller Companies | -10.8 | -8.0 | -2.8 |
| Technology & Media | -10.3 | -1.8 | -8.5 |
| Asia Pacific | -9.8 | -3.8 | -6.0 |
| European Smaller Companies | -9.8 | -8.8 | -0.9 |
| UK All Companies | -9.1 | -7.6 | -1.5 |
| Europe | -8.8 | -6.3 | -2.5 |
| Biotechnology & Healthcare | -8.2 | 0.9 | -9.2 |
| Japanese Smaller Companies | -8.0 | -1.6 | -6.4 |
| Asia Pacific Equity Income | -6.1 | -4.0 | -2.1 |
| Global | -6.0 | -0.8 | -5.2 |
| Japan | -5.4 | -3.1 | -2.3 |
| UK Equity Income | -3.5 | -4.0 | 0.5 |
| Global Equity Income | -1.6 | -2.7 | 1.1 |
| Environmental | -1.3 | 6.7 | -8.0 |
Source: www.theaic.co.uk / Morningstar. Weighted averages for AIC sectors with at least three constituent companies.
There are no equity sectors at a premium at the moment although there were only two at the start of the year — being environmental and biotech/healthcare.
I think the discounts on technology and biotech/healthcare look the most appealing myself. I own three trusts in the latter sector and have topped up on all of them this year. While technology trusts have seen their NAVs hit hard, for obvious reasons, biotech/healthcare has held up reasonably well by comparison so the fact that their discounts have widened so much seems a little harsh.
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Only four equity sectors have seen their discounts narrow this year. Unsurprisingly, Commodities is one of those with Country Specialist (essentially just Vietnam trusts), UK Equity Income and Global Equity Income being the others.
The discount damage across alternatives is much heavier, especially in property trusts, growth capital, and private equity:
Alternatives
| Sector | Discount on 18 Nov 2022 (%) | Discount on 31 Dec 2021 (%) | Change since 31 Dec 2021 (% pts) |
|---|---|---|---|
| All sectors | -14.3 | -3.6 | -10.7 |
| Growth Capital | -43.4 | -3.6 | -39.9 |
| Property – Europe | -42.8 | -0.6 | -42.2 |
| Insurance & Reinsurance Strategies | -36.2 | -22.7 | -13.5 |
| Property – UK Residential | -35.4 | 0.4 | -35.8 |
| Property – UK Logistics | -32.7 | 14.3 | -47.0 |
| Leasing | -30.2 | -24.2 | -6.0 |
| Property – UK Commercial | -25.6 | -10.3 | -15.3 |
| Private Equity | -24.8 | -1.4 | -23.4 |
| Debt – Direct Lending | -17.4 | -6.1 | -11.2 |
| Property – Debt | -16.1 | -7.2 | -8.9 |
| Debt – Structured Finance | -10.5 | -10.7 | 0.2 |
| Debt – Loans & Bonds | -5.3 | -4.2 | -1.1 |
| Infrastructure | -2.3 | 14.3 | -16.6 |
| Renewable Energy Infrastructure | -1.5 | 6.5 | -8.0 |
| Hedge Funds | 3.8 | -1.8 | 5.5 |
| Flexible Investment | -19.5 | -16.2 | -3.3 |
Source: www.theaic.co.uk / Morningstar. Weighted averages for AIC sectors with at least three constituent companies.
There is only one sector across the whole industry with a premium rating right now and that is Hedge Funds. This is due to the popularity of BH Macro, which has an impressive record of thriving in volatile market conditions. I profiled it a few months ago at Money Makers and an edited and updated version of that article should be appearing in The Investment Trusts Handbook 2023, due to be released next month.
It’s worth noting that one or two trusts can distort the sector average significantly. Scottish Mortgage dominates the Global sector and 3i does the same in Private Equity. 3i sits on a 10% discount so the sector average of 25% hides the fact that the vast majority of other trusts are on a discount of between 30% and 50%.
Four alternative sectors were trading at a premium at the end of 2021 but are now at a discount — Infrastructure, Renewable Energy Infrastructure, Property – UK Residential, and Property – UK Logistics. The last of these has recorded the widest move of all, going from a 14% premium to a 33% discount. Tritax Big Box REIT with nearly £6bn in assets makes up most of this sector but Urban Logistics REIT and Warehouse REIT are no minnows as they both have £1bn of assets.
It may seem odd that Renewable Energy Infrastructure has seen less of a decline than plain vanilla Infrastructure this year. Both are suffering from higher discount rates but the former has also been bashed by the electricity generator levy in the Autumn Statement. However, energy prices have risen so much, the NAVs of these funds are still quite a bit higher than a year ago. The 14% premium on Infrastructure as of the end of 2021 looks especially rich with hindsight and probably would have come down in a normal market year anyway.
Of course, there is somewhat of a time lag with many of the NAV figures in Alternatives with figures generally produced on a quarterly or semi-annual basis, so in many cases, these discounts will narrow automatically once more up-to-date figures are produced incorporating the latest changes in interest rates, discount rates, etc. A large discount is worth investigating but shouldn’t be the sole or even main reason for buying, in my opinion, as the devil can be lurking in the detail.
The future of fundraising?
The long-term impact of fundraising will be interesting to watch. Many of the sectors that were at a premium have seen the trusts they contain grow significantly in size in recent years by issuing new shares and IPOs in these sectors have also found the wind at their backs with investors keen to pay a small premium at flotation rather than a chunkier premium once a trust is up and running. Most of these trusts still have extensive pipelines, so they will be hoping that their premiums return or they may need to pick and choose their projects. The trust sector is adept at reinventing itself so we may see some creative solutions to this problem as well.
Amazingly, there have been no new trust IPOs so far in 2022 although three are trying to get away before the year-end (Conviction Life Sciences, Long Term Assets, and AT85 Global Mid-Market Infrastructure). We’ve already seen a number of trusts try to float only to pull their plans a few weeks later when the next wave of market volatility came along.
I’ve been snapping up a number of trusts that I already own at various discounts this year, although with prices being so volatile I try not to take any figure at face value, usually double-checking the NAV published for the previous day to make sure the discount is what it appears to be. To be honest, there have often been several trusts that look equally appealing, so I tend to work through them as and when I have funds available.
Disclaimer
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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