Cherry Reynard, Portfolio Adviser Magazine, February 2024:
Investment trusts have a well-deserved reputation as an effective way to manage such illiquid assets as property, smaller companies and infrastructure, yet the past 18 months have also highlighted the problems of this type of vehicle, as discounts have widened in response to higher interest rates, cost-disclosure problems and concerns over underlying valuations. Increasingly, though, these problems are fading, leaving discounts looking anomalous and, potentially, creating an opportunity for more discerning investors.
While all trust discounts have widened during the recent stockmarket volatility, investment companies managing illiquid assets have suffered disproportionately. There have been a number of factors at work – the first being that rising interest rates have created uncertainty around valuations. For illiquid assets, investors need to rely on third-party valuations rather than market pricing, which may happen monthly or quarterly, depending on the trust..
The move back to fixed income in response to higher yields has been another important consideration..
James Carthew, head of investment companies at QuotedData, now sees opportunities in a range of areas. “Small caps are unloved in most parts of the world,” he says. “Smaller small caps – or ‘microcaps’ – particularly so. For overseas investors, there is also a dislike of the UK, a situation that has persisted since Brexit. On top of that, domestic investors have been diversifying away from the UK. This combination of factors makes the funds focused on UK micro caps look especially cheap.”..
A shift in interest rate direction could certainly be a catalyst for change. “The infrastructure funds have been rallying since long-term bond yields peaked in mid-October,” says Carthew. “Confidence was knocked again when inflation came in above expectations for December but I can easily imagine most of the funds in this sector will be back trading at asset value by the end of the year.” ..
Within infrastructure trusts, says QuotedData’s Carthew, older, larger, more liquid funds with solid track records are already trading at tighter discounts and will likely be the first to trade back at asset value. He picks out Bluefield Solar, Greencoat UK Wind and JLEN Environmental Assets as examples here but adds: “There are still some real bargains though, such as SDCL Energy Efficiency on a 40% discount and Gore Street Energy Storage on 36%.”
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