Investment trust shares reaching discounts to their net asset values not seen since the 2008 global financial crisis, but investors are not yet being tempted into buying them, according to investment platform research.
Average discounts on London’s listed closed-ended funds started the year above 12%, widened to 14% mid-summer and have since hit 15%, according to industry data, with funds in some sectors trading at more than a 20%, 40% or even 50% below the value of their NAVs.
Has this prompted bargain hunting from private investors?
In short, no, not yet, according to the UK’s second largest investment platform, Interactive Investor (ii), which examined the buying ratios of its customers.
Demand for investment trusts has actually dipped in relative terms this year to date versus last year, according to ii’s data, though trusts are far more popular than open-ended funds and unit trusts despite being far fewer in number.
Looking at ‘real time’ buys, which strip out regular investing, ii said 54% of trades in collective funds (trusts, funds, ETFs etc) since the start of 2023 have been in investment trusts, versus 46% for open-ended funds.
But during the same period in 2022, the share was 59% for investment trusts and 41% for funds.
“There’s no question that investment trusts are grappling with some headwinds right now, and it is interesting to see that private investors aren’t rushing out to the sales just yet,” said ii’s collectives specialist Kyle Caldwell.
“There’s never any guarantee that a discount won’t widen out further, and it’s always worth scratching under the surface to make sure something isn’t cheap for a very good reason.”
The unusually wide discounts have occurred against a backdrop where global stock markets have climbed around 10% this year in sterling terms.
But ii noted that there seemed to be “no sign” of discounts narrowing.
Three reasons were suggested for this stubbornness: the impact of higher interest rates on trusts investing in ‘alternative’ sectors for income, with rising bond yields stealing their thunder; new rules around cost disclosure that are making some investment trusts less attractive to investors.
“That includes wealth managers and fund managers, who had already been weaning themselves off trusts on scale grounds,” says Caldwell.
The third reason, he says, is “scepticism” about the valuations of private assets, with some high-profile issues in the industry that “haven’t helped”.
While private investors on the platform have been reluctant to take a plunge on trusts quite yet, some may take confidence that stock market history suggests that brave contrarian investors in investment trusts can be rewarded.
Also, for investors who like passive funds but wish to diversify, investment trusts offer unique structural features, such as the ability to use gearing to enhance returns and smooth dividends for tougher times.
“There may be no quick fix for investment trust discounts, but the investment trust industry has tended to be good at managing them over the long term. And in a world where growth can be hard to come by, there’s nothing wrong with a good bargain if you can find one,” said Caldwell.
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