Investment Trust Discounts

Investment Trust Discounts – the Underlying Numbers

We estimate there to be 10 investment companies currently trading at year-high discounts to net assets, but if you take a closer look, a significant number are trading within 10% of their year-high discounts.

By
Frank Buhagiar
05 Jun

We estimate there to be 10 investment companies currently trading at year-high discounts to net assets. Compare that with the 35 plus we were reporting earlier in the year or the 55 plus seen in Q4 2023 when the narrative of higher for longer interest rates around the world took hold. With far fewer investment companies trading at a discount, it appears London’s investment company space is over the worst of its discount problem.

What’s more, two of the 10 trusts trading at year-high discounts over the course of the week ended Friday 31 May 2024, JPEL Private Equity and VPC Specialty Lending Investments, are currently in wind-down mode – share prices of companies realising assets can find themselves unloved, at least until the timing of when significant chunks of cash will be returned to shareholders becomes clear. The true number of 52-week high discounters arguably lower than the headline number suggests then.

Before hanging up the bunting, it’s worth taking a quick look behind the headline numbers. For the above sequence only tells part of the story – just those trusts trading at their highest (or lowest depending on one’s point of view) discounts to net assets for the year. What it doesn’t capture are those trusts that are trading at discounts close to their year-high levels. Not much difference, after all, between a trust trading at its widest discount of the year and one trading a handful of basis points off its high. A fuller health check of London’s investment company space is needed, one that takes into account those investment companies trading at or close to their 52-week high discounts. That way we can gain a clearer idea if London’s investment company sector is indeed over the worst of its discount problem.

A quick scan of London’s investment companies and the discounts at which they trade reveals the below list of companies trading within 10% of their year-high discounts:

Hansa Investment Company (HAN)

New Star (NSI)

Tetragon Financial Group (TFG)

Diverse Income Trust (DIVI)

UK Equity Income

Finsbury Growth & Income (FGT)

UK Equity Income

European Assets (EAT)

CC Japan Income & Growth (CCJI

JPMorgan Emerging Markets (JMG)

Syncona (SYNC)

Menhaden Resource Efficiency (MHN)

VPC Specialty Lending Investments (VSL)

Invesco Bond Income Plus (BIPS)

NB Distressed Debt (NBDD)

NB Distressed Debt Global Class (NBDG)

Digital 9 Infrastructure (DGI9)

Downing Renewables & Infrastructure (DORE)

Ecofin US Renewables & Infrastructure (RNEW)

NextEnergy Solar (NESF)

Asian Energy Impact (AEIT)

JPEL Private Equity (JPEL)

Schroder British Opportunities (SBO)

Schroder European Real Estate (SERE)

CEIBA Investments (CBA)

Property – Rest of the World

Develop North (DVNO)

Real Estate Credit Investments (RECI)

Third Point Investors (TPOU)

In total, 31 investment companies are trading within 10% of their year-high discounts. And among those listed, several are dealing with company-specific issues including, ongoing strategic reviews or realisation of their assets. Activity such as this generates a degree of uncertainty which in turn can lead to steep discounts. A further two investment companies, Invesco Bond Income Plus and Develop North, are trading on small year-high discounts that can hardly be counted as problematic at this point. In short, the investment trust sector’s discount problem, certainly not as painful as it has been in recent months.

And yet, the higher for longer interest rate narrative hasn’t gone away. If anything, as the months pass by, the narrative has got stronger. In the US, forecasts for the first rate cut are being pushed out to the end of the year/beginning of 2025. In the UK, with 2024 almost at the mid-point, the much-anticipated first cut has yet to happen despite many commentators predicting this would take place in Q1.

With increased uncertainty over the timing and pace of interest rate cuts, why then aren’t more investment companies trading at or close to year-high discounts? After all, interest rate sensitive sectors such as infrastructure, debt, renewables and equity income were regular features in our Discount Watch list when rates were being raised, and it was widely thought they would remain at elevated levels for some time.

So, the question is, will discounts play catch up and widen from here? Or will central banks come to the rescue by embarking on the long-awaited rate-cutting cycle?