Investment trust bargain hunter: Income trust with 4% yield on biggest discount in years

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Funds that have a bias towards mid and small-cap companies residing outside the blue-chip FTSE 100 index have endured a difficult 2016, suffering from the Brexit blues.

Standard Life Equity Income trust, managed by Thomas Moore, is no exception, posting a share price loss of 13 per cent over the past year. As a consequence of investors rotating out of small-cap trusts following Brexit, the trust’s discount over the past six months has moved from trading close to par (the value of its assets) to a discount today of 9 per cent. At its highest point, towards the end of October, the discount stood at a touch over 10 per cent.

Nevertheless a discount of 9.3 per cent today versus a 12-month average of 2.9 per cent looks like an attractive entry point, particularly when various commentators are tipping Moore to return to form in 2017.

Jean Matterson, a partner at Edinburgh-based Rossie House Investment Management, says she likes Moore’s disciplined stock-picking approach, which places strong emphasis on valuations. To that end Moore shies away from defensive stocks, including British American Tobacco and GlaxoSmithKline, which he considers expensive.

Matterson named Standard Life Equity Income trust as her UK investment trust tip for 2017. A wide range of other trust, fund and share tips for the coming year feature in Money Observer’s upcoming Wealth Creation Guide (on newsstands from 22 December). 

‘It (the trust) is not dependent on large UK companies for income, preferring the multi-cap approach and finding stocks that have sound growth prospects along with increasing payouts,’ says Matterson.

Another fan of the manager is Alan Steel, a financial adviser at Alan Steel Asset Management. Steel says Moore can be forgiven for a poor 2016. ‘The UK domestic mid cap sector has not benefited from sterling strength. But this is a good manager, who is overdue a strong recovery,’ he says.

Over a longer timeframe the trust’s performance is ahead of its peers, returning 87 per cent on a five year view, ahead of the average UK equity income trust return of 79 per cent.

Our investment trust bargain hunter series has over the past couple of months highlighted various discount opportunities in the small cap space. However, taking a look at the Investment Association’s UK Smaller Companies sector today, the majority of trust discounts have narrowed and are trading close to their one-year averages, unlike Standard Life Equity Income trust

There are, however, a couple of exceptions: Strategic Equity Capital and BlackRock Smaller Companies.

Strategic Equity Capital. a Money Observer Rated Fund, which over five years boasts the second-best net asset value (NAV) return of the 17-strong Association of Investment Companies UK Smaller Companies sector, is trading on a 8.5 per cent discount, wider than its one-year average discount figure of 5.6 per cent. The discount was 10 per cent when we highlighted the trust as a potential bargain at the start of December.

BlackRock Smaller Companies, another Money Observer Rated Fund, has a discount of 15.5 per cent, slightly wider than its one-year average discount of 14.1 per cent.

INTRODUCING INVESTMENT TRUST BARGAIN HUNTER

Each month Money Observer will be highlighting a couple of investment trust bargains, both online and in our monthly magazine.

We will also occasionally draw attention to investment trusts that are 'too hot to handle' - those that are trading on big premiums.

Our ideas come from regular conversations with investment trust analysts, and we will try to provide a mixture of bargains, from 'hidden gem' trusts with less than £200 million in assets to the more established names that typically trade on a smaller discount or premium.

HOW WE FIND INVESTMENT TRUST BARGAINS

For the sake of simplicity, rather than using technical measures such as the 'Z score', in this column we will identify bargains by comparing current discounts with their 12-month averages.

Only those trusts with a wider discount than their average are considered. We will also look at the overall sector and the quality of the trust, and then take a view on whether the discount looks a good opportunity.


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