Bargain Hunter: equity income investment trust on rare double digit discount

A few years of poor performance has put this respected equity income investment trust on a double digit discount. The trust, however, may soon turn a corner. 

The past decade’s bull market has made it hard to find investment trusts sitting on double-digit discounts. Almost every asset has performed well, and investors have piled in accordingly.

That’s proved equally true of the UK equity income sector, says Simon Moore, senior investment manager at Seven Investment Management (7IM). With investors’ hunger for yield and the sector housing some of the oldest, largest and best-known investment trusts in the industry, there has been no lack of interest.

However, Moore notes: ‘As sure as eggs are eggs, these discounts can and do come back.’ And so it is the case with Perpetual Income and Growth, our latest Investment Trust Bargain Hunter find.

The trust, managed by Mark Barnett, currently sits on a discount of 11.9 per cent, compared to its 12-month average of -9.6 per cent , giving it a z-score -1.5 (investment trusts with a z-score of -1.5 and lower are considered cheap).

According to Gavin Haynes, managing director at Whitechurch Securities: ‘It is no surprise that the discount on this trust has widened.’ Haynes notes that the trust has had a ‘very difficult time over the past three years under Mark Barnett, significantly underperforming both the peer group and the UK stock market and failing to generate a return for investors during this time.'

Moore points to a ‘perfect storm’ leading to the trust falling out of favour, including Brexit uncertainty, some well-publicised portfolio downgrades, and general worries about future potential FTSE 100 dividend cuts.

Both commentators agree that now might be a good time for long-term investors to look at buying in.

Haynes points out that despite the past few years of disappointing performance, ‘Barnett has managed this trust since 1999 with excellent long-term returns.’ Similarly, Moore notes that the trust is ‘run with high conviction and will always have periods where the manager’s style falls out of favour, and a long-term view is important.’

Performance may soon turn a corner. ‘With many global markets looking expensive, one area that we favour is UK dividend stocks,’ says Haynes. ‘Barnett has been taking advantage of indiscriminate selling (due to Brexit fears) of quality domestic-focused business to increase exposure on attractive valuations.’

Steps are also being taken to address other concerns about the trust. According to Moore, anxieties over dividend cuts may be overdone: ‘Some investors might be reassured by the strong dividend reserves, which are amongst the highest in the investment trust sector, according to AIC data.’

Haynes also points out that Barnett has recently implemented a programme to buy back shares, which should reduce the trust’s discount.

‘The trust provides a well-diversified portfolio of large, medium-sized and smaller UK dividend stocks with a yield of 3.8 per cent and a competitive ongoing charge of 0.7 per cent,’ adds Haynes. ‘For the contrarian this may be a good time to have a look at this trust.’

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment