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Investment trust bargains: how to find them and where to look in 2023

by Kyle Caldwell from interactive investor, 19th January 2023:

We explain the tricks of the trade to find potential discount opportunities, and name the three areas where analysts are finding plenty of value in 2023…

The first thing to point out is that while investment trust discounts offer opportunities to buy a basket of investments for less than the sum of their parts, over the long term it is the performance of those underlying investments that has the biggest influence on the overall total shareholder returns. To put it simply, if the trust doesn’t perform well it is likely to consistently have a high discount due to a lack of demand for its shares.

Another important thing to bear in mind with investment trust discounts is that they typically have a greater tendency to converge to their mean discount rather than the value of their underlying investments.

Therefore, it is useful to consider the current discount versus history, and take a view over one, three and five years, for example. It is also worth comparing an investment trust discount with its wider sector.

Bear in mind that some trusts consistently sit in a tight discount range, meaning it is not a “true” bargain and the discount is merely “normal”…

Investors who bought growth capital trusts on high premiums a year ago will have suffered. QuotedData, the analyst, points out that heading into 2021 Schiehallion Fund and Seraphim Space Investment Trust had respective premiums of 59% and 20%. At the start of this year, both were trading on discounts of 20% and 57%. Rising interest rates were the trigger for the de-rating in both the discounts and share prices, due to both trusts investing in tomorrow’s potential growth stock winners….

Investment trust bargains at the start of 2023

Following a tough year for most investment trusts in 2022, there’s still plenty of opportunities for investors. One area favoured by those looking for value opportunities is UK smaller companies…

Property is another area the pros suggest offers opportunities. High interest rates have negatively impacted property valuations and put pressure on balance sheets due to increases in financing costs. However, James Carthew, head of investment company research at QuotedData, sees value in trusts specialising in logistics.

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