Following the steep market falls two months ago there remain numerous examples of investment trusts trading on wider discounts than their 12-month average discount figure.
Heavy stock market falls during a six-week period in February and March negatively impacted the majority of investment trusts.
Since then global markets have marched higher in response to increased investor confidence, which is pinned on hopes that a growing number of countries have a firm handle on the coronavirus pandemic.
In response, various investment trusts have seen both their share price and net asset value (NAV) performance pick up over the past two months. In many cases the gap between the two (the share price discount to NAV) has narrowed as sentiment has improved, meaning there are less standout investment trust bargains. According to Winterflood, the broker, the average trust is trading on a discount of 8.2%, notably lower than its record high level of 18.4% on 23 March.
However, following the steep market falls there remain numerous examples of investment trusts trading on wider discounts than their 12-month average discount figure – the criterion used by this column. Therefore, at such times the ‘z-score’ measure arguably becomes more useful as an aid to find the biggest bargains.
The z-score is a way to compare a trust's current discount or premium to its historic level. A positive z-score shows the current value is higher than the historic mean, while a negative value indicates the opposite. As a rule of thumb, a score of minus 2 or lower suggests the trust is looking cheap, while a positive score of 2 or more suggests it looks expensive.
QuotedData, the analyst, screened the investment trust universe for 10 investment trusts with the highest z-scores, and picked out three that it believes offer the most compelling value opportunities for bargain hunters: The North American Income Trust, Polar Capital Global Financials Trust and Aberdeen Emerging Markets Investment Company.
James Carthew, head of investment company research at QuotedData, points out that all three are out of form, having seen their share price performance notably suffer during the sell-off. But in each case, in the context of how the underlying investments in each portfolio have fared (as measured by the net asset value performance), Carthew believes the high discounts seem unjustifiably cheap.
North American Income
The North American Income Trust (NAIT), a Money Observer Rated Fund that’s managed by Fran Radano, has like other income funds seen its short-term performance negatively impacted as various businesses have opted to cut or suspend dividends.
But Carthew notes that its share price has fallen significantly more than its net asset value returns: a 20% share price decline over the past three months versus a 9% decline for its net asset value, according to figures from FE Analytics. Over one month the same pattern plays out, with the trust’s share price performance showing a loss of 1.6% versus a gain of 5.2% for its net asset value.
“It has underperformed its direct peer-group over 2020, with its discount widening to 13%. The widening over May came without a strong catalyst (the net asset value held steady) and was more pronounced than that of its closest listed-peer, BlackRock North American Income (BRNA).
“Like BRNA, NAIT’s largest sector allocations are to financials and healthcare which both went into the pandemic in good shape. Though a number of US companies have been suspending share buybacks (the main form of capital distributions in the US), particularly in the case of financials, capital buffers remain well above regulatory requirements. Regulators have not suspended dividends.”
In the event that a large number of shares in the portfolio cut or suspend dividends, Carthew points out NAIT’s revenue reserves can cover the vast majority of its dividend. The shares yield 4.1%.
As at 26 May, NAIT’s discount stood at -12.9% versus its 12-month average discount of -1%.
Polar Capital Global Financials
From launch in July 2013 the trust (PCFT) made “decent gains” up until they “were lost” by Covid-19, points out Carthew. He adds: “Banks in the UK make up a large part of the index but have been a pretty poor investment in recent years. PCFT looks beyond the UK for the best financial stocks globally – it has done much better.”
Carthew notes its fund managers think that many financials stocks, which were still unloved at the start of the year, now look like very attractive investment opportunities.
In respect of its dividend the board is using the trust’s revenue reserves to maintain income payouts. The shares yield 4.2%.
The discount is -11.4% versus a 12-month average discount figure of -4.7%.
Aberdeen Emerging Markets Investment Company
This trust (AEMC) seeks to identify which GEMs offer the most upside potential, then gains exposure through third-party open- and closed-ended funds. AEMC pays a quarterly dividend funded partly from capital, resulting in a current yield of 4.3%.
Carthew says the broad-based emerging markets trust has lagged its immediate peer group over the past year, but not by much.
He adds: “It is 3.4% behind the best-performing trust, Templeton Emerging Markets. But, AEMC’s share price has been savaged. Its managers have been switching investments in some open-ended funds into closed-ended funds trading on discounts. This should give a kick to AEMC’s performance when markets start to recover. The managers point out that the emerging market space is no stranger to crises and AEMC has weathered these well in the past.”
The discount stands at -19.4% versus a 12-month average discount figure of -14.1%.