How investment trust discounts may widen from narrowest in 15 years

The average discount in the investment trust sector is currently close to its narrowest level for 15 years, according to new research by Stifel - but the broker notes that discounts could widen in the event of a change in investor sentiment.

Stockmarkets have been running at record levels both in the UK and US since the turn of the year, and investment trusts have been obvious beneficiaries, Stifel says, with investors net buyers of shares due to strong stockmarket returns.

In the days following the EU referendum in June, the average investment trust sector discount stood at 11 per cent, providing a significant value opportunity for investors, according to analysts Iain Scouller and Maarten Freeriks.

However, equities quickly bottomed before recovering sharply to recoup losses and continue the uptrend to make all-time highs. This caused average discounts to narrow to 5.1 per cent where it sits now.

Over the past year, Stifel points out that only two sectors have seen any material discount widening: Europe and European smaller companies. In contrast, 11 sectors have seen discounts narrowing in excess of 2 per cent - the largest are private equity, renewables and financials.

Stifel analysts also point out that this narrowing is also driven by an increase in the use of discount control mechanisms and other measures used to enhance shareholder value.

Two clear examples of this are global sector behemoths Alliance Trust, which now aims to buy back shares on a 4.75 per cent discount and Foreign & Colonial, which has narrowed its discount level from 10 per cent to 7.5 per cent.

The global sector in general is now trading at a 4.9 per cent discount – its narrowest level in the past year – with Monks now on a 2 per cent discount compared to a 12-month average of 9 per cent and Scottish Mortgage moving to a 5 per cent premium since acceptance into the FTSE 100, compared to its 12-month average of a 2 per cent premium.

However, Scouller and Freeriks conclude: 'Returns have been strong, but some discounts may be vulnerable to any equity market shake out on a short-term basis.'

There are still bargains out there, as our sister website Money Observer continues to highlight. On Tuesday it found that the £1.4 billion UK equity income trust formerly run by star fund manager Neil Woodford, Edinburgh IT, currently trades on a wider-than-normal discount of 6 per cent.

Another UK equity income trust looking particularly cheap is Standard Life Equity Income, which is currently on a discount of 10.4 per cent - almost treble its 12-month average discount figure of 3.6 per cent.


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