US investors have bought more than $15bn (£11bn) of UK equities this year, more than they have allocated to other overseas markets, according to analysis by Schroders that could bode well for undervalued shares in investment trusts.
“We are currently seeing increased interest in UK companies from our US and international investors, with many noting the relative value available across a range of sectors,” said Sue Noffke, head of UK equities at Schroders, in comments reported in the Sunday Times.
Noffke, lead manager of Schroder Income Growth (SCF) investment trust, told the paper Schroders had seen investor interest in “financial institutions, as well as firms within the defence and Ai industries”.
She added: “In addtion, some domestic defensive stocks, such as those in telecoms, utilities and insurance, are trading at a discount compared to their international peers, yet appear to have been largely overlooked by domestic investors.”
Schroders analysis of US Treasury data shows that while American investors have also put more money into Asia, Japan, Latin America and China, they have not been buying shares in Europe when the UK is excluded. This is a sign of renewed appetite for London-listed shares after a long period when they have been overlooked largely on the grounds of post-Brexit political volatility.
The FTSE All-Share has rallied 14% this year, outstripping the 2.1% total return in sterling for the S&P 500. However, the US stock market index remains well ahead over five years having risen 99%, or nearly doubled on the back of buoyant technology stocks, while the All-Share has returned 74% with dividends included.
Nevertheless, domestic investors continue to shun FTSE stocks with Calastone data showing four years of UK equity fund outflows continue. International investors are more positive with the paper reporting Morningstar Direct data showing net increases in purchases of FTSE-linked exchange-traded funds (ETFs) in June and July, the first two consecutive months of inflows in a year.
While much of this money will have gone into FTSE 100 blue chips, it could bode well for UK equity investment trusts. On average their shares trade 6% below the value of their investments, a discount that while it has narrowed from a one-year average of 7%, offers a cheap entry point for a market still valued on a lower multiple than the US.
Noffke’s £217m trust stands on a 7.7% discount that has narrowed from a 10% one-year average, according to Deutsche Numis data.
Other UK equity income trusts in the same sector have seen their discounts widen. Among those currently looking cheap is Law Debenture (LWDB), a strong performing £1.3bn rival to Schroder Income Growth, that has slipped to a modest 1.2% discount.
Merchants (MRCH), an £818m value-style fund run by Allianz Global Investors, trades on a 7.6% discount, more than double its 12-month average, after a dip in performance.
Diverse Income (DIVI), a £239m smaller company focused portfolio, posted good results last week highlighting a recovery may be in progress after a difficult four years. However, holders of 31% of its shares recently elected to sell them in the annual redemption window, which has seen the discount widen to 9% from a one-year average of over 6%.
