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Short-term blip or fundamental shift?

Growth trusts tumble: short-term blip or fundamental shift?

Citywire Wealth Manager, Jennifer Hill, 30 March 2021

2020 was a vintage year for off-market equity investors. Shares in leading specialist trusts Chrysalis Investments and Scottish Mortgage rocketed 110% and 107% respectively.

More recently some of that momentum has gone into reverse, however. Chrysalis is now 9.62% below its high in mid-February and Scottish Mortgage is now 16.5% lower, as a recent sell-off in US Treasury yields put pressure on highly priced growth stocks.

The question investors now face is whether this has simply wiped some froth from the market or whether it is the beginning of a more fundamental reckoning for businesses which have ridden speculative interest to historically aggressive valuations…

Opportunity set

Given the premium the growth stocks commanded over value stocks during the second half of 2020, some cyclical reweighting in favour of the latter may also be healthy, said Charles Stanley analyst Ben Johnson.

‘There will be periods when these types of trust take a back seat in the market to more cyclically exposed portfolios, as was clearly the case when the positive vaccine news hit markets last November or when bond yields started moving sharply higher this February,’ he said…

Private for longer

Against these cyclical considerations, many sector specialists point to long-term structural shifts that have plausibly enhanced the value of off-market investments, as businesses appear to be staying private for longer. ‘Increasingly, companies are turning to private equity backers rather than the stock market for finance,’ said James Carthew, head of investment trust research at QuotedData…

Exit valuations

…Most funds with unquoted exposure boast investments accumulated over a number of years and a steady stream of realisation opportunities. Investments are invariably valued conservatively, so exits tend to generate decent uplifts in NAVs.

Last year, for example, private equity trust Apax Global Alpha saw an average 40% uplift in the values of investments that it realised over their pre-sale value. ‘That might suggest that these funds still look like decent value,’ said Carthew.

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