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“Not a single investment trust that I cover is trading at a premium,” an analyst at a leading investment bank told Questor this week.
He said this had happened before only twice in his career, during the financial crisis and, briefly, in the depths of the pandemic. The statistics bear out his experience.
The average discount across the investment trust sector stands at 13.4pc, according to the Association of Investment Companies, the trusts’ trade body. It said the average figure since June 2008 was 6.5pc.
Even at the end of that year, at the depths of the financial crisis, the average discount, at 17.7pc, was not vastly wider than today. Current discounts in some sectors are even steeper.
Commercial property trusts trade at an average discount of 21.5pc, renewable energy infrastructure trusts at 19.9pc, other infrastructure trusts at 15.8pc and private equity trusts at 33pc (we exclude 3i, a highly unusual fund).
Figures are from the AIC as of Tuesday, the latest available. Trusts suffer disproportionately when markets are nervous because widening discounts come on top of falls in the value of the underlying assets.
That can make them painful to hold but it does also offer a great opportunity to invest new money, either for the first time or as a top-up to an existing portfolio of trust holdings. Either way, now is certainly not a time to sell.
Of course, we don’t know for certain that discounts will narrow, even if history suggests strongly that they will, and we certainly can’t predict when it might happen.
However, buying good assets cheaply always makes sense because you are paying less for each £1 of return they will produce in future, irrespective of what happens to the discount. And those cheaply bought pounds of future returns are even more valuable if they compound.
It will probably feel hard, when everyone seems to be running for the exits, to head in the other direction and commit your cash to these unloved vehicles. But this is precisely how to make serious money.
In the words of the late Sir John Templeton, one of Britain’s greatest investors, “It is impossible to produce a superior performance unless you do something different from the majority. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”
It’s also worth pondering a little on the nature of those investors who are rushing to sell their investment trust holdings.
Many are professional wealth managers who look after the savings of the reasonably or very well-off.
Wealth managers have tended in the past to allocate a slice of the money they manage to investment trusts but in recent years that slice has been getting smaller.
Some of this is because wealth management companies are getting bigger by combining, and when you have more money to manage it’s harder to put meaningful sums into trusts, some of which are not traded very actively.
Individual advisers at wealth management companies are steadily being given less discretion over what they buy for their clients as centralised “buy lists” or approved portfolios take over; these again may be unable to include trusts because the volumes of money involved would be too great.
None of this selling, of course, says anything about the quality of the trusts being sold; it simply makes them cheaper. And sooner or later such selling must die down.
In the light of today’s wide discounts, especially in certain sectors, Questor suggests that readers, if in a position to do so, do take the opportunity to put money into trusts. Next week we will name some specific trusts that we think would make a particularly good home for your long-term savings.
We’ll highlight listed funds that are well run, have good assets, do not have excessive borrowings and yet find their shares trading at wide discounts.
“It may take time,” the investment bank analyst said, “but if you buy steeply discounted trusts now I think in five years’ time you will be very happy you did so.”
Investment trust news
Two JP Morgan trusts, MidCap and UK Smaller Companies, have agreed to merge. The combined fund, renamed JP Morgan UK Small Cap Growth & Income, will be managed by the existing team of Georgina Brittain and Katen Patel and will pursue UK Smallers’ existing investment objective and policy. Shareholders of each trust will have to approve the deal.
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