Investment trusts across a range of sectors have been the leading risers on the London stock market this week, helped by the recent drop in gilt yields picking up pace dramatically.
It also came as the gap between investment trust share prices and the value of their net assets was calculated last week to have widened to the largest discount seen since the 2008 financial crisis.
Some analysts also suggested that accelerated by a big dollop of hasty closing of short positions by hedge funds and other short-term traders.
The biggest rises in investment trusts over the past five days were for a mix of alternative asset funds, particularly infrastructure, private companies and property.
The top 10 includes three battery storage funds, led by Gore Street Energy Storage Fund PLC (LSE:GSF), the private equity investment trust Schiehallion Fund (LSE:MNTN) and five real estate investment trusts, led by British Land Company PLC (LSE:BLND), Hammerson PLC (LSE:HMSO) and Capital & Regional PLC.
Many of these had sunk to all-time or multi-year lows, with some of the discounts among the largest discounts, with Gore Street's having been topping 40% before the bounce - and now at 31% much closer to the renewable energy infrastructure sector's 20% average.
Trusts on the up this week - five-day increase
- Gore Street Energy Storage 16.8%
- Schiehallion Fund 14.2%
- British Land 13.1%
- Hammerson 12%
- Capital & Regional 10.6%
- GCP Infrastructure Investments 10.3%
- Gresham House Energy Storage Fund 9.82%
- NewRiver REIT 9.06%
- Derwent London 8.89%
- Harmony Energy Income Trust 8.44%
- Foresight Solar Fund 8.43%
- Ground Rents Income Fund 8.39%
- Geiger Counter 8.16%
- 3i Infrastructure 7.59%
- Henderson Smaller Companies Investment Trust 7.73%
- ICG Enterprise Trust (LSE:ICGT) 7.67%
- Aurora Investment Trust 7.38%
- Cordiant Digital Infrastructure 7.37%
- Caledonia Investments (LSE:CLDN) 6.1%
- Rockwood Realisation 7.16%
Excellent value still on offer
Based on the view that bond yields have peaked, JPMorgan Cazenove said infrastructure funds "still offer excellent value".
Its investment company analyst team's core picks are 3i Infrastructure PLC (LSE:3IN), HICL Infrastructure Company Limited (LSE:HICL) and Greencoat UK Wind PLC (LSE:UKW).
At Stifel, the investment trust team highlighted fund sectors especially sensitive to interest rates, examining prospects as "rates peak and hopefully start to decline during 2024".
Highlighted sectors included Private Equity trusts ("Less pressure on levered structures and re-rating of listed comparable companies used in multiple valuations could see the sector rally strongly"); UK Small and Mid-Cap ("Likely to be one of the fastest sectors to recover if interest rates fall given predominance of growth stocks and levered structures"); UK Equity Income ("FTSE 100 companies which tend to be the primary asset in these funds continue to look ‘cheap’ on a PE of only 10.9x [from mid-Sept], with scope for re-rating"); Infrastructure ("If gilt yields continue to fall, there could be some re-rating, with investors taking the view that discount rates used in the valuation models have peaked. The sector is highly correlated with gilts"); Renewable Energy ("Recent price performance also highly correlated with gilts ... A recovery in investor sentiment expected, but discount rates may be relatively ‘sticky’ on the way down") and Technology ("Recovery in tech valuations may broaden out from the largest seven companies, with the small and mid-cap tech companies benefiting the most").
The “great opportunity" to invest in investment trusts amid the near-record discount has also been highlighted in prominent newspaper columns, including in the Telegraph today, which noted that many of the investors rushing to sell investment trust holdings are professional wealth managers exiting as they have less individual discretion to choose their investments and is not a reflection of the quality of the trusts.
In the piece was a quote from the late Sir John Templeton, founder of the Templeton Growth Fund:
“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.”
But investors are hardly swarming for indiscriminate buying of trusts, with many having moved little this week.
Indeed, it is “far too soon” to call a full-scale market recovery, said Nick Britton, research director of the Association of Investment Companies (AIC), to Proactive, though it was undeniable that the falls in inflation have buoyed the prices of a broad swathe of trusts.
“Investment trusts can be great investments to hold in a recovery because their discounts tend to narrow at the same time as the underlying value of their portfolio increases,” Britton said.
“This leads to a double whammy which can sometimes be enhanced further by gearing. For example, coming out of the financial crisis in 2009, the average investment trust returned 39% over the calendar year.”
Should trusts be more proactive?
There was also a call this week from well-respected investment company manager, Peter Spiller, for trusts to be more proactive in selling assets and buying shares.
In comments alongside his Capital Gearing Trust's interim results, Spiller said:
"With discounts so wide in the alternatives sector it is reasonable to ask whether the stated NAVs can be relied upon. Our answer is a cautious “yes”. The evidence of solidity is mounting with asset disposals at or above book value being announced across many trusts in multiple sectors. If the valuations can be relied upon why are so many trusts trading at large discounts? It is simply a question of supply, demand and the quantity theory of asset prices. Huge amounts of capital have been raised in the alternative space in recent years. Over the last 18 months multi-asset funds have seen large redemptions and wealth managers have switched their focus to highly tax efficient low coupon gilts. With demand falling and the supply remaining constant, the balancing variable – price – must take the strain, with all too painful consequences. The diagnosis reveals the cure. With no prospect for a change in demand, supply needs to be withdrawn from the sector. For now the only contraction comes from takeovers. It would be preferable for the sector to help itself by selling assets and buying-back shares or returning capital to shareholders. We see precious little evidence of this to date and have generally been frustrated by the attitudes of boards and management teams. We will continue to engage with boards and hope to report greater progress to you in the full year results."
Analysts at JPMorgan Cazenove said they would generally agree this ‘arbitrage’ makes sense, but that for those trusts invested in unquoted assets, this is rarely achieved quickly.
Cazenove's Christopher Brown and Adam Kelly said:
"There is evidence at the margin that assets are being sold near, and, in the case of the much maligned Private Equity sector, premiums to NAV. But in our view there is not yet sufficient transaction volume to convince the market that NAVs are totally robust. In our view falling long real bond yields are more effective tonic, as they lessen the downward pressure on those NAVs."
While Spiller's preference is for buybacks as the solution to the problem of wide discounts in alternatives, the analyst paid said there remained a debate as to whether short-term debt repayment makes more sense.
"Our view is that too much leverage results in a wider headline discount than would otherwise be the case and that while buying back shares provides a sugar rush in the form of a higher NAV per share, it does increase leverage as a % of NAV. Thus there is a risk that the ‘headline’ discount widens to reflect the higher leverage. While debt repayment does not increase the NAV, we think it should result in a narrower headline discount as investors worry less about covenants, rising funding costs and the higher potential impact on NAV for a given fall in the underlying portfolio where it is perceived to be overvalued."