Week 20 and the number of investment companies trading at a 52-week high discounts continues to follow a similar pattern to 2023. The latest Discount Watch reveals all.

ByFrank Buhagiar

It is our estimation that seven investment companies saw their discounts hit 12-month highs over the course of the week ended Friday 17 May 2024 – five less than the previous week’s 12.

Week 20 and the number of investment companies trading at 12-month high discounts is close to year lows. Of the seven 52-week high discounters, six come from alternative sectors – two funds each from debt, property and private equity. The only equity-focused investment company – Invesco Perpetual UK Smallers (IPU).

We’ve previously highlighted how 2024’s weekly discount tracker appears (so far at least) to be following a similar path to the one observed in 2023 – see below 2023’s discount tracker covering the first 20 weeks of the year.

Let’s hope the similarities end at Week 20 because from Week 21 2023 onward, the number of year-high discounters steadily increased – by Week 44 2023 there were 56 funds trading at record discounts for the year.

The top-five discounters

FundDiscountSectorGround Rents Income GRIO-70.10%PropertyCeiba Investment CBA-68.99%PropertyVPC Specialty Lending Investments VSL-43.10%DebtJPEL Private Equity JPEL-40.67%Private EquitySchroder British Opportunities SBO-36.17%Growth Capital

The full list

FundDiscountSectorVPC Specialty Lending VSL-43.10%Debt

Develop North DVNO-1.20%Debt

Schroder British Opportunities SBO-36.17%Growth Capital

JPEL Private Equity

JPEL-40.67%Private EquityGround Rents Income GRIO-70.10%Property

Ceiba Investment CBA-68.99%

PropertyInvesco Perpetual UK Smallers IPU-16.25%

Funds mentioned in this article:

Ground Rents Income Fund OrdVPC Specialty Lending Investments OrdSchroder British Opportunities OrdJPEL Private Equity OrdInvesco Perpetual UK Smaller Ord

The Results Round-Up – The Week’s Investment Trust Results
Which fund’s investment managers are sticking with their conservative approach as they think markets may take a hit? And which fund has generated a NAV per share total return of +381.9% over the last 10 years?

By
Frank Buhagiar

Schroder Asia Pacific (SDP) goes bargain hunting
SDP beat the benchmark over the half year – with a +5.7% NAV per share total return compared to the benchmark’s +5.3%. Chairman, James Williams, puts the outperformance down to stock selection and a significant underweighting to China. According to the investment managers, Chinese stocks had a miserable year – avoiding the laggards just as important as picking the winners.

SPD see reasons for thinking China can have a better year. Chief among these, ‘consensus expectations are now very low and this is reflected in lower valuations than a year ago.’ The managers are on the lookout for high-quality names they can pick up the cheap.

Numis: ‘The fund has an impressive long-term track record, with NAV returns of 9.8% pa over the past decade compared with 7.8% pa for the MSCI AC Asia ex Japan.’

Caledonia’s (CLDN) in control
CLDN’s three investment pools all contributed to the fund’s +7.4% full-year NAV total return: Public Companies (+12%); Private Capital (+12.3%); Funds (+2.2%). The fund has a long-term approach and CEO, Mat Masters, believes the global investor’s diversified portfolio and strong balance sheet can keep on delivering despite the uncertain external environment. Masters has got the team ‘focused on what we can control.’

Winterflood: ‘NAV TR +7.4% vs CPIH +3.8% and FTSE All Share TR +8.4%. Return was therefore within long-term target of inflation +3%-6%.’

Numis: ‘Caledonia has a strong long-term track record, delivering NAV total returns of 164% (10.1% pa) over the last ten years compared with 83% (6.2% pa) for the FTSE All Share Index and 228% (12.6% pa) for the MSCI World Index.’

JPMorgan “We think Caledonia remains an attractive proposition for investors seeking long-term real investment returns and a diversified portfolio.”

Investec: ‘The onset of the pandemic ignited a sharp de-rating. We would regard a fair value discount level, in normal market conditions, to be around the 20% level. We initiate with a Buy recommendation.’

HICL Infrastructure (HICL) sends a message
HICL’s full-year results included, as you’d expect, a flurry of numbers but perhaps ‘New dividend guidance of 8.35pps for FY 2026 and reaffirmed guidance of 8.25pps for the year to 31 March 20251’ best sums up the message. The £509m raised during the year via asset divestments at a weighted average 11% premium to carrying value also sends a message: the sale proceeds paid off the Revolving Credit Facility and funded a £50m share buyback programme. The sales added c. 2.5p to NAV per share although overall this came in 6.7p lower at 158.2p due to an increase in the weighted average discount rate to 8.0%.

Chairman, Mike Bane, believes HICL’s diversified portfolio, which includes over 100 high-quality, inflation-linked assets, offers shareholders attractive risk-adjusted value today and exposure to powerful infrastructure megatrends for tomorrow. A case of jam today and tomorrow.

Investec: ‘The portfolio continues to perform well operationally, and we reiterate our Buy recommendation.’

Numis: ‘We continue to view the rating as undemanding.’

Liberum: ‘Overall, we remain BUYers of the fund with a target price of 160p.’

JPMorgan: ‘We are Overweight HICL which is a constituent of our model portfolio.’

STS Global Income & Growth (STS) sticking to its guns
STS’ total assets increased c. 50% during the full year – the acquisition of former stablemate Troy Income & Growth Trust added £118 million so that by year end, total net assets stood at £314.4 million. Full-year share price/NAV total return came in at +6.1%/+4.8% respectively compared to the benchmark’s +11.5%. The Managers did not buy into the economic recovery narrative that buoyed global markets. ‘Investors anticipated an economic recovery – about which we are sceptical – leading the best performing sectors to be more cyclical areas such as extractive industries, banks and industrial companies.’ The managers’ quality focussed, conservative approach may have lagged the market but they continue to believe market exuberance may take a hit if the economy slows.

Numis: ‘The portfolio is managed using Troy’s distinctive style, with a focus on quality companies that generate high returns on capital through sustainable competitive advantages. As a result, it is heavily focused on defensive sectors, including Consumer Staples which have trailed behind other areas of the market in recent years.’

Scottish Mortgage’s (SMT) managers are excited
SMT Chair, Justin Dowley, described the fund’s latest full year as challenging yet rewarding. Dowley said, ‘the macroeconomic and geopolitical factors driving market anxiety are too numerous to mention’. The portfolio’s holdings of ‘resilient companies that possess the potential to shape the future of the modern economy’ have continued to ‘deliver strong operational performance and remain in robust financial health.’ After a two-year hiatus, share price and NAV returns were positive –share price up +32.5% (discount narrowed from -19.6% to -4.5% courtesy of that £1bn buyback programme); NAV up +11.5%. The FTSE All-World Index fell between the two – up +21%.

10-year track record still stacks up. NAV per share up +381.9% compared to +218.2% for the FTSE All-World index (total return). Portfolio Manager, Tom Slater, is ‘confident there’s more to come’ thanks to long-running themes such as artificial intelligence, digitalisation, scientific and engineering progress and the energy transition.

Jefferies: ‘The results provide the financial backdrop for the recent share buyback programme, highlighting both lower gearing and lower private asset exposure that offer the headroom to make very extensive use of buybacks in support of once again trading close to NAV.’

Numis: ‘The shares closed last night on a c.10% discount and we believe this offers significant value.’

Schroder Oriental Income’s (SOI) stock pickers get it right again
SOI outperformed over the half-year period – NAV per share up +7.5, while the MSCI AC Pacific ex Japan Index was up +1.9%. Over three years, NAV total return has now outperformed the index by +23.6% and since inception in 2005 the fund has generated total returns of +489.0% compared to the index’s +288.5%. The secret of SOI’s success? The Investment Manager’s focus on identifying quality companies. As Chairman, Paul Meader, explains, ‘Fundamentally, we are stock pickers and do not seek to predict macro-economic trends or geopolitics.’

Numis: ‘The fund benefits from an experienced fund manager, Richard Sennitt, who has run open-ended Asian Income mandates at Schroders for over 20 years, having joined in 1993. Schroder Oriental Income pays a dividend yield of c.4.5% and dividend growth has been strong since inception.’

Shires Income (SHRS) waiting for interest rates to fall
SHRS’ full-year NAV and share price total returns moved in opposite directions – NAV per share up +5.1, share price down -5.7%. The benchmark beat them both, returning +8.4%. Chairman, Robert Talbut, is not surprised, ‘the performance for the year is in line with what we would expect, given the defensive and income focused nature of the portfolio’. On the corporate front, it was a busy year. Combining with abrdn Smaller Companies Income increased SHRS’ size by more than a third. That’s one way to grow.

Looking ahead, the investment managers believe as interest rates fall this will increase the relative appeal of the proposition. The managers explain that investors can currently earn a decent risk-free return from cash but, as rates come down, they believe SHRS’ 6.5% dividend yield will become more appealing again.

Winterflood: ‘At 31 March, 80% of portfolio was invested in equities and 20% in preference shares.’

Capital Gearing Trust (CGT) goes seismic
CGT’s +1.8% full-year NAV total return was described by Chair, Jean Matterson, as far from satisfactory – the flexible investor failed to match the Consumer Price Index’s +3.2% rise. Rising interest rates, widening investment trust discounts and a strong sterling all held back performance. However, all is not lost. With nearly 70% of the portfolio invested in high-quality bonds, the major reset seen in fixed income markets has been a headwind these past two years. But with the fund’s bonds now ‘yielding well in excess of inflation’, future returns should be well underpinned from here on.

Matterson ends her statement with a little seismology, ‘As the tectonic plates of macro-economic fragility and technological change grind against one another, no one can tell when or where the next earthquake will occur. This Company exists to protect its shareholders from just these sort of disruptions.’

Numis: ‘Capital Gearing’s results show a period of muted returns, which is largely unsurprising given the fund’s defensive positioning. The managers point to the exceptional value in investment trusts where exposure has been increased. We agree. The average sector discount remains close to post GFC lows, with many alternative asset ICs in particular offering exceptional value.’ Well said.

The Tip Sheet

The Times says risk-averse investors should consider sweeping up shares in Supermarket Income REIT, while The Telegraph reviews its successful Pershing Square Holdings tip.

ByFrank Buhagiar•21 May, 2024•

Tempus: Time to sweep up shares in this trust

The Times tipster is tipping Supermarket Income REIT (SUPR), particularly for investors sitting on the risk-averse end of the investing spectrum. That’s because, as the name suggests, SUPR generates its income by collecting rent from supermarket tenants – 77% of rent as at last financial year-end came from Tesco and Sainsbury’s alone. The REIT also counts the likes of Waitrose, Morrisons, Asda, Marks & Spencer, Lidl and Aldi as tenants.

The fund’s portfolio is currently comprised of 73 predominantly ‘large, edge-of-town outlets that offer click-and-collect or online delivery services’. Historically, the UK has been the company’s sole hunting ground but recently 17 Carrefour stores in France were acquired for €75 million. Although this represents ‘a tiny addition to the portfolio, its significance is that it marks a fresh diversification strategy’.

The existing portfolio has been valued at over £1.7 billion. And yet, the shares trade 15% below net asset value and offer a dividend yield of 8.3%. The pandemic, Ukraine war and higher interest rates are all cited as reasons for why retail rents have been depressed and sentiment low. As Tempus writes, ‘prospective investors should consult professional advisers to ensure that the Reit format is right for them, but subject to that Supermarket Income looks on course for recovery and expansion. Advice: Buy.’

Questor: This US fund has rallied with its billionaire manager’s notoriety

US fund? Billionaire manager? That can only be Pershing Square Holdings (PSH) and its star manager Bill Ackman. The Telegraph’s Questor Column tipped the US equities investor back in August 2022 citing Ackman’s conversion from ‘Wall Street buccaneer to Warren Buffett’. The tip was well-timed as the share price is since up +57%, making the fund the top performer in the North America sector – over five years shareholder total return stands at +225%, double the US stock market’s +108.6%.

How has this been achieved? Firstly, several holdings have performed well – Universal Music Group is 26% higher while Alphabet is up 39%. Share buybacks have also helped. So too, Ackman’s growing presence on social media – he has 1.2 million followers on X. Having such a large and growing following has, according to Questor, helped raise PSH’s profile – the fund was one of the most bought in February and March. Increased investor interest has helped narrow the discount at which the shares trade at to 27% from 36%.

The discount is still higher than average though. Questor points the finger at the fund’s relatively high fees – a 1.5% annual management fee plus 16% performance fee charged on all investment gains. Last year, fees incurred amounted to $467.5m (£370.8m). But there may be positive movement on the fee front. In February 2024, Ackman unveiled plans for a new fund, Pershing Square USA. The interesting bit for PSH shareholders is that 20% of fees earned by the managers will go towards offsetting that PSH performance fee. In terms of numbers, if the US fund raises US$10bn, the UK fund’s costs will reduce by US$40m.

Questor concludes ‘With the fund performing so well and delivering strong returns after all costs, we are happy to remain holders but will look out for any signs the fund manager is taking his eyes off the ball or a widening in the discount.’

£££££££££££££££

But as it will always be, best to DYOR.

Ian Cowie: this investment trust sector has plenty of bargains

Our columnist explains why he’s confident about the outlook for trusts tapping into a long-term trend. While the sector has seen short-term pain over the past year, he says valuations are cheap and investors can plug into above-average income yields.

by Ian Cowie from interactive investor

Wind power became Britain’s biggest source of electricity last year, according to National Grid data published by Imperial College London this week. But many investors remain frozen in the fossil fuels era. Is it time for investment trusts to help blow the warm winds of change through your portfolio?

Winter gales helped wind farms generate 32% of Britain’s electricity, compared to 31% from gas, said Iain Staffell of Imperial, who added: “Britain has become only the sixth country in the world where wind farms are the top source of electricity.”

Demand for electricity is likely to double in the next few years, according to the International Energy Agency (IEA), which should support share prices of businesses that generate this form of power. Demand is being driven by the rise of heavy new consumers including artificial intelligence (AI), data centres and electric vehicles. 

The IEA predicts that a total of 1,000 terawatt hours of power (with a terawatt equalling a trillion watts) will be needed globally by 2026, compared to 430 terawatts in 2022. The spokesperson added: “This is roughly equivalent to the electricity consumption of Japan, which has a population of 125 million people.”

Closer to home, for one hour last month, Britain’s National Grid hummed happily along almost free from fossil fuels. Between 12.30pm and 1.30pm on 15 April, coal and gas power plants provided just 2.4% of the country’s electricity supply, a record low.

Across Britain, homes and businesses were running almost entirely on electricity generated by wind turbines, solar panels, nuclear reactors, biomass, plus cables from France and Norway. The UK government has pledged to create a zero-carbon electricity grid by 2035. Labour aims to reach that target by 2030.

Here and now, investment trusts that provide professionally managed exposure to renewable energy can enable individual investors to fund and benefit from these trends, generating capital growth and above average dividend income. These trusts had a hard time when energy prices were falling and interest rates were rising, making their high yields relatively less attractive, but they are now recovering.

For example, Greencoat UK Wind  UKW

 is the top-performing fund among more than 20 rivals in the Association of Investment Companies (AIC) “Renewable Energy Infrastructure” sector. Over the last decade, five years and one-year periods, UKW’s total assets of more than £4.7 billion delivered total returns of 138%, 37% and  -0.4%. It currently yields just over 7% dividend income that has risen by an annual average of 8.15% over the last five years.

It is important to beware that the past is not necessarily a guide to the future and that dividends can be cut or cancelled without notice. However, if UKW succeeds in sustaining its current rate of raising shareholders’ income in future, this would double in less than nine years.

Bluefield Solar Income Fund  BSIF

a £1.4 billion fund, came second over the last decade with a total return of 94%, followed by 10% over the last five years and -17% over the last year. Disappointing recent capital returns were offset to some extent by BSIF’s high yield of 8.4% dividend income, rising by nearly 3% per annum over the last five years.

Renewables Infrastructure Grp  TRIG

a £3.3 billion fund, came third over the decade with total returns of 72% followed by 8% and -11% over the medium and short term. Once again, a high yield of 7.4% rising by just over 2% per annum delivered dividend comfort to offset capital disappointment.

However, potential investors should beware so-called value traps, where the price of a high income today can be low or no capital growth in future. Alternatively, too high a yield can sometimes signify capital destruction in the past.

For example, the industrial-scale batteries specialist Gore Street Energy Storage Fund Ord GSF

 yields nearly 11.5% dividend income but destroyed 31% of shareholders’ capital last year after a positive return of 9% over the last five years. As it launched in 2018, GSF lacks a 10-year track record.

Investors willing to accept lower initial income can gain more diversified exposure to rising demand for electricity. For example, Ecofin Global Utilities & Infra Ord EGL

 is a £271 million fund where America is the single biggest country weighting, followed by Italy, Britain and France.

0.35% and National Grid NG.11.50%. Founded in 2016, it delivered total returns of 70% over the last five years and minus -5% over the last year. EGL’s current dividend yield of 4.3% increased by an annual average of just over 4%.

All these funds remain out of fashion and their shares are priced below their net asset values (NAVs) to reflect that fact. For example, UKW trades -10% below its NAV; BSIF has a -22% discount; TRIG is -20% and EGL is -12%.

While there is no guarantee that discounts will narrow – and they could widen – all those valuations might look like bargains if demand for electricity continues to rise, as the IEA predicts. Buyers today could enjoy capital growth and plug into above-average income yields. Or am I just whistling in the wind?

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Ecofin Global Utilities and Infrastructure (EGL) and Greencoat UK Wind (UKW) as part of a globally diversified portfolio of investment trusts and other shares.

I’d take the Warren Buffett approach to building a passive income empire

Story by Christopher Ruane

Warren Buffett at a Berkshire Hathaway AGM© Provided by The Motley Fool

When it comes to passive income, we can all learn a thing or two from Warren Buffett.

The billionaire investor earns millions of dollars every week on average in passive income. How does he do it? Simple: dividends from companies whose shares he owns.

Some companies pay big dividends

While some businesses do not pay any dividends, others have small ones as a percentage of their current share price (what is known as the dividend yield) and some pay a large yield.

Take Phoenix (LSE: PHNX) as an example.

With a dividend yield of just over 10%, buying its shares could mean that I get £10 of passive income per year in future for each £100 I put into Phoenix shares now.

But in reality things may be more complicated. Dividends are never guaranteed, so the current yield of any company does not necessarily give me an indication of what I will actually earn from it in future.

How to hunt for dividends

So, how has Warren Buffett managed to build such sizeable passive income streams?

Of course the amount he is investing and the long timeframe of his stock market career both help. But a critical factor has been his approach to finding companies in which to invest. He looks for industries he expects to benefit from strong future customer demand.

Within them he looks for firms that have some sort of competitive advantage he reckons can help them do well in future.

Whether or not Phoenix is up Buffett’s street I do not know. He does not own shares in it.

But financial services and specifically insurance have long been favourite investment areas for him.

With a large customer base of insurance and pensions clients, I expect Phoenix could do well in future. It can benefit from owning well-known brands, including Standard Life.

Then again, the company faces risks. For example, its book of mortgages involves certain assumptions about property prices. If they tumble unexpectedly, that could hurt profits at Phoenix – and my passive income expectations if I buy its shares.

Taking a smart approach to investment

Like Warren Buffett, therefore, I always keep my portfolio diversified across a range of companies.

My first move would be setting up a share-dealing account or Stocks and Shares ISA today.

I would then put some money into it, or start drip-feeding some cash regularly. At that point I would start my search for passive income superstar shares, using some of what I have learned from Warren Buffett.

TRIG – Renewables Infrastructure Group

Kepler Disclaimer
Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by TRIG – Renewables Infrastructure Group. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
TRIG’s portfolio continues to evolve, despite equity capital markets being closed…
Overview
The Renewables Infrastructure Group (TRIG) is one of the ‘haves’ in the renewable energy infrastructure universe, with mature assets generating significant cash alongside a decent development pipeline. It has scale, which has allowed it to assemble a high quality, institutional portfolio. This puts it in a good position relative to smaller, more nascent peers.

Whilst the board is prioritising the repayment of more expensive short-term borrowings with surplus cash and capital, the portfolio is not standing still by any means. Wind and solar assets continue to make up the bulk of the portfolio by value, but batteries (or ‘flexible capacity’) now increasingly feature. We discuss TRIG’s recent acquisition of Fig Power, a specialist developer of battery assets in the UK, in more detail in the Portfolio section. Portfolio diversification leads to significantly smoother cash flows from which to pay the Dividend than might otherwise be the case.

TRIG’s approach to borrowings insulates shareholders from changes in interest rates, and given each project is also paying down debt every year, in time reduced asset level gearing will allow the managers to regear, meaning TRIG will have cash to reinvest and further build the portfolio. Elsewhere in the portfolio, the managers have been selectively selling assets, which enables TRIG to pay down the more expensive floating-rate debt, but at the same time enhance the overall portfolio construction and performance.

One significant initiative the team are working on is enhancing the ability of existing wind farms to generate power through retrofitting enhancements to wind turbine blades. RES’s trials at two of TRIG’s sites demonstrated an energy yield uplift of up to 5%, which has now been fully deployed at one site. The team are progressing well with a phased installation on four more sites, and an appraisal of a further three sites is underway.

Analyst’s View
TRIG’s manager, InfraRed Capital Partners, has a background in traditional infrastructure, which in our view has had an important influence on how the portfolio has been assembled. TRIG’s managers aim to minimise risks across the portfolio, by spreading investments across six European countries (including the UK). This means that revenues are diversified across different political regimes and across weather systems.

In absolute terms, TRIG’s prospective total returns are attractive, in line with long-term total returns from equities. Taking the weighted average discount rate of 8.1%, deducting ongoing charges of c. 1% per annum (see Charges) to get a simple estimate of NAV total returns going forward, investors stand to achieve NAV total returns of c. 7.1% per annum on a simplistic basis. As we have discussed in the Portfolio section, these returns should correlate with inflation , meaning that a good proportion of these returns can be considered real. The risks investors are taking to achieve these returns are minimised through diversification, and currently there is a potential for tailwinds to these returns from interest rates falling, with valuations already having taken the hit from inflation falling.

Sentiment towards TRIG and the renewable energy infrastructure peer group has waned, leading to a disconnect between the NAV and the share price. In our view, this serves to highlight the potential opportunity, especially given the attractive long-term income profile of TRIG, and the potential for capital growth with Fig Power and the trust’s development activities. TRIG remains a quality offering amongst the peer group. Any narrowing of the discount would serve as an accelerant to shareholder returns, over and above the NAV returns generated.

Bull
A high yield of 7.4%, with the potential for NAV growth from reinvestment of surplus cash
Has a pure exposure to diversified assets, technologies and subsidy regimes, which are uncorrelated to equity markets, and scores well on ESG matters
Inflation-link has been positive, building on the historical stability of TRIG’s cash flows

Bear
Discount to NAV may persist for some time
Dividend cover not as high as that of funds which are not amortising, i.e. paying down debt
Macro uncertainty (e.g. lower power price forecasts and high interest rates) have provided a headwind to the NAV, and may persist

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At present there is no email subscription and the only contact at present, is via post a comment. Best wishes.

One. Make a plan and stick to it thru thick and thin, as there will be plenty of thin.

Two. Set a figure and write it down and how u intend to get to the figure.

Three. Accept that the amount invested may fall as u re-invest your dividends.

Four. Have some cash in your ‘safest’ position as u wait for the next market crash.

Five. Watch for the news from your Trust about their next dividend and their forecast for the next year.

One. To buy a portfolio of higher yielding Investment Trusts to provide a yield of 7% as this doubles your income in ten years.

Two. The income after ten years will be 14-16k on a starting portfolio of 100k. The amount is not in question although depending on the market the time scale could slip.

Three. As u don’t want to kill the goose that lays the golden eggs* u never intend to sell any of your Trusts. Over time the amount invested will start to rise as compound interest starts to make a big difference to your portfolio.

Four. It may mean having an investment in a Government gilt pair traded with a higher yielder to maintain a blended yield of 7%.

Five. If one of your Trusts drastically changes their dividend policy, the Trust must be sold.

* In an emergency one of your Trusts could be sold the equivalent of withdrawing x amount of dividends years in advance.