Bargain hunter: exploit the discount gap on sister trust managed by same top investor

Our latest investment trust bargain hunter takes a look at two funds run by the same fund manager – one is on a small premium, but the other is offering a discount of 11 per cent.

Income investments of all descriptions continue to be highly prized in the continuing record low-interest rate environment.

As a result it has become tougher to find a bargain in the case of income-focused investment trusts – particularly in the case of alternatives, with various infrastructure closed-ended funds trading on premiums in excess of 10 per cent.

The hunt for yield has also resulted in some sister investment trusts – pairs of trusts with the same fund manager at the helm – to trade on remarkably different valuations.

Take Schroder Oriental Income (SOI) and Schroder AsiaPacfic (SDP), for example, both managed by Matthew Dobbs. The income trust, with its dividend yield of 3.4 per cent, is currently trading on a small premium of 0.2 per cent, which can hardly be deemed expensive. But in contrast, the growth-focused SDP is available on an 11 per cent discount, so in this context investors can access the same manager at a much cheaper price.

Neil Jones, an investment manager at Hargreave Hale, the wealth manager, thinks the discount gap between the two trusts is too big to ignore. ‘You’re getting the same manager, but two different styles. For me the 11 per cent discount outweighs the higher dividend yield on offer (SDP is yielding around 1.1 per cent, so the difference in yield is 2.3 per cent).’

He adds: ‘The 11 per cent discount is completely out of kilter with the underlying value of the trust’s assets.’

SDP’s current discount of 11.3 per cent is just shy of its 12-month average discount figure, which stands at 12 per cent. At the time of writing (23 August) only one Asia Pacific ex Japan trust was offering a higher discount of 12 per cent – Edinburgh Dragon.

SDP is one of Money Observer’s adventurous investment trust tips for 2017/18. In the case of both SDP and SOI Dobbs looks for quality companies with strong balance sheets, good cash flows and sound corporate governance that he can buy at attractive valuations.

Inevitably there will be some overlap between the two trusts, but in terms of the top ten positions just two stocks feature in both lists – Taiwan Semiconductor Manufacturing and Samsung.

In addition, the country weightings differ markedly. In SOI Hong Kong comprises 25 per cent of the portfolio, while China accounts for 13 per cent. In contrast, China makes up 29 per cent of SDP and the weighting to Hong Kong is 19 per cent.

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