Investment trusts experiencing a resurgence in popularity?
In the world of UK-focused investment trusts, a shift has been observed in recent times. Two of the largest small-cap trusts, Aberforth Smaller Companies (ASL) and BlackRock Smaller Companies (BRSC), have seen their discounts move from the mid-teens to the mid-single digits, according to reports. This change might seem attractive, with double-digit discounts and 8% yields on offer, but a word of caution is advised.
The investment trusts Rockwood Holdings and Pershing Square Holdings have faced significant NAV discounts due to market skepticism about their concentrated portfolios and activist strategies. Experts predict that these discounts may persist in the near term due to ongoing market volatility and investor caution.
Interestingly, the infrastructure and property sectors have seen a decrease in activity. In three specific areas - infrastructure, renewable energy, and property - discounts remain stubbornly large. Trusts such as HICL Infrastructure (HICL), International Public Partnerships (INPP), Renewables Infrastructure Group (TRIG), JLEN Environmental Assets (JLEN), and Supermarket Income REIT (SUPR) continue to trade at mid-teens discounts despite dividend yields of around 8%.
However, it's not all doom and gloom. Lower interest rates could potentially help these sectors, although a return to previous levels is uncertain. Determining asset worth in these sectors is challenging, making NAVs less reliable.
On a positive note, the equity investment trusts sector has not been affected to the same extent as the infrastructure and property sectors. The Schiehallion Fund (MNTN) has moved from a discount of 40% to 11%, while the Scottish Mortgage Investment Trust (SMT) has seen its discount to Net Asset Value (NAV) decline from around 20% this time last year to just 10% today.
The cost of capital for alternative-income investment trusts has increased, and the same can be said for the cost of borrowing in these sectors. The Fidelity Special Values (FSV) has seen its discount fall from 9% to 5%, and Edinburgh Worldwide (EWI), with its large allocation to SpaceX, has seen its discount shrink from 21% to 8% over the past year.
Perhaps the most significant shift has been observed in the private equity sector, with the HgCapital Trust (HGT) going from trading at a discount of 18% to NAV to selling for a premium over the past year. Central banks keeping rates higher for longer could lead to further uncertainty, but the recovery in the private equity and venture capital markets offers a glimmer of hope.
The Mercantile Investment Trust (MRC) has also seen its discount fall from 15% to 6%. Despite these positive signs, it's important to remember that there is no guarantee that these trusts will return to their former levels of success. As always, careful consideration and a dose of caution are advised when investing in the ever-evolving world of UK investment trusts.
