Investment trust bargains to take advantage of stockmarket wobble

Investment Trust Bargain Hunter: we run through the ‘cheap’ investment trusts that have been tipped to outperform peers on an 18- to 24-month view.

It was a final quarter to forget for global stockmarkets, particularly US equities, but one positive is that share price falls have led to cheaper valuations.

For investment trust investors, the sell-off has opened some opportunities as discounts have widened. However, it is worth pointing out that on the whole there are not a huge number of bargains, as the sector average share price discount to net asset value (NAV) ended the year at 4.3% compared with 3.5% a year earlier. Over the past decade the average discount has stood at 6.7%.

Moreover, the number of investment trusts trading on premiums to NAV was broadly unchanged year-on-year, falling marginally from 117 to 113, which represents just over a third of the investment trust universe.

But as Winterflood, the investment trust broker, points out in its recommendation list, which is updated at the start of each year, there are several trusts trading on a discount above their 12-month average.

The potential narrowing of a discount plus a conviction that a trust will outperform peers on an 18- to 24-month view are the two main criteria of Winterflood’s recommendations, which are then included in its model portfolio.

Based on data at the close of trading on 11 January, the trusts it is recommending that are trading on notable discounts above their 12-month average are: Standard Life UK Smaller Companies (-6.9% discount versus -4.9% 12-month average), JPMorgan American (-5.3% against -3.9%), HgCapital Trust (-8.6% versus -6.6%). Pantheon International (-24.6% against -17.8%), Fair Oaks Income (-8% versus 0.5 premium), Tritax Big Box REIT (-4.1% against 2.4% premium) and Standard Life Investments Property Income (-12.5% versus 2.7% premium).

Winterflood also notes that some trusts that tend to persistently trade on premiums can now be picked up on small discounts, such as Bankers and Jupiter European Opportunities.

It adds: “Discount movements still show a degree of correlation to equity markets, and discounts widened during the downturn in the first quarter of last year, while becoming more volatile in the year-end sell-off.”

But, as data-crunching by Money Observer revealed last week, there were also plenty of trusts on pricey premiums at the start of 2019. For trusts trading on a high premium – 5% or higher as a rule of thumb – it is generally not a good idea to buy because such premiums tend not to be sustainable over the long term and can turn into a discount when conditions change. Instead, a more prudent approach is to wait for the premium to cool.

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