Black Friday deals can be found all year round in the investment world, if you know where to look, says David Holder, senior investment research analyst, Square Mile Investment Consulting and Research.
Black Friday, the affectionately named day after the US Thanksgiving celebrations when bargain hunting consumers snap up goods at cut prices, has now become a firm fixture on the UK calendar. And who doesn’t love a bargain? However, the opportunity to buy assets at a reduced price is not restricted to the world of retail, or indeed to the last Friday of November. The structure of closed-ended funds, or investment trusts, means that they can offer investors potentially attractive discounts year-round.
As the original collective investment structure, investment trusts pool investors’ money to invest in the securities of a range of underlying assets. They have a fixed number of shares issued through an initial public offering in the same way as any other publicly listed company. These shares are traded on a stock exchange where their prices fluctuate independently of the value (typically known as the net asset value or NAV) of the strategy’s underlying investments depending on demand and market sentiment towards the assets in which it invests. This means the share price may trade above or below its NAV, leading to a premium or a discount, something which can act in an investor’s favour.
Discounts result from a range of factors, from poor performance to market volatility, or simply due to negative sentiment toward the sector in which an investment trust is exposed. This means they can provide a discounted entry point to a portfolio of assets, leading to enhanced returns should sentiment reverse and the discounts narrow or, indeed, move to a premium.
Furthermore, as a whole the investment trust sector has suffered from muted investor appetite over recent years evidenced by widening discounts. This lower demand means that many closed-ended vehicles are trading at discounts which could be unrepresentative of their future performance potential. For the savvy investor, this creates an opportunity to acquire assets at a price significantly below their stated NAV.
The Square Mile A-rated Fidelity Special Values investment trust offers such an opportunity. It currently trades at a discount of -8.93%* although over the last year it has been as narrow as -4.76%*. While its managers Alex Wright and Jonathan Winton can invest in UK companies of all sizes, they tend to have a bias towards mid and small-cap stocks. The UK in general, and companies further down the market cap scale in particular, have been out of favour for some time leading to significant outflows from UK-focused strategies. However, this investment trust is managed with the mindset that investor sentiment can be slow to react to a changing situation and seeks to unearth opportunities in unloved and out of favour stocks that are entering a period of positive change. While it is difficult to exactly pinpoint what might be the catalyst to reverse investment sentiment toward the UK, greater political stability, a government with a pro-growth agenda, lower levels of inflation and a gradual reduction in interest rates are likely to be supportive. Investors in the Fidelity Special Values investment trust should be well placed to benefit from greater appetite for UK equities, both from an increase in the value of its underlying assets and a narrowing of the discount arising from greater demand for its shares.
Property is another sector which has been relatively unloved over recent years and the AA-rated TR Property Investment Trust, which invests in the shares of pan-European property companies, as well as some physical property in the UK, currently trades at a discount of -9.94%*. Its manager, Marcus Phayre-Mudge, has an exceptionally deep knowledge of the pan-European listed and physical real estate markets and is supported by a wider team who have equally impressive expertise in the sector. Mr Phayre-Mudge adopts a process which is focused on bottom-up analysis within which top-down considerations are an important factor. Through this, he seeks to identify well-managed companies, typically across the market cap spectrum, though he often sees more mispricing opportunities at the lower end of the market cap spectrum relative to his benchmark. Ultimately, he aims to identify quality assets with the potential to benefit from macro tail winds. The NAV of the portfolio has outperformed over multiple time frames with returns being generated through stock selection in the listed element of the portfolio and within the more modest allocation to physical real estate. Indeed, the opportunity for growth in asset values is viewed as more desirable than pure yield or wide discounts to NAV.
There has been somewhat a renaissance in the Japanese equity market over recent years, however the A-rated JPMorgan Japanese Investment Trust currently trades at a discount of -12.39%*. However, we note that over the last year, its shares have traded at a 1.5%* premium to NAV reflecting the fluctuating investor appetite for Japanese equities. Its Tokyo-based lead manager, Nicholas Wendling, believes that Japan is an inefficient market offering a multitude of under-researched companies. At the same time, there are numerous companies and sectors facing long-term structural headwinds which he actively avoids. His focus is on unearthing higher quality companies with strong future growth prospects, taking a bottom-up approach and seeking to leverage the stock ideas produced by his well-resourced team. This stock selection, which spans the market cap spectrum, is the principal driver of returns, although the portfolio can fall victim to macro headwinds leading to volatile performance. On balance, however, this is an attractive strategy for investors seeking exposure to Japanese growth companies.
As with all purchases, the expression ‘caveat emptor’ applies when considering if a share price discount to NAV represents an investment trust bargain. It is always important to assess what the stated NAV reflects, especially in those less frequently valued portfolios often found within the “real assets” space such as in private equity, real estate or infrastructure. For those investment trusts that publish a daily NAV, the key is determining if the discount is due to the poor performance or skillset of its management team or is more symptomatic of weak demand for the assets in which it is invested. The investment trust universe holds a wide range of attractive and idiosyncratic investment strategies, many of which have served generations of investors well over many decades and whose discounts are more representative of a broader market malaise in sentiment and short-term mispricing than a deterioration in the strong fundamentals and long-term return potential of their underlying holdings. This presents the opportunity for cash-canny investors to snap up a portfolio of securities of robust companies at a knock-down price.
* Source: Morningstar as at 25.11.24
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
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