Investment trust bargain hunter: Racy small cap trust slips to 10 per cent discount

Investment trust bargain hunter

Compared to other income-focused trusts, Acorn Income is a tiddler with a market cap of £55 million, but its track record over the years has left rivals in the shade.

Over five years the trust has returned 147 per cent, while over 10 years its share price has risen 220 per cent. The gains outstrip the Numis Smaller Companies Index (the trust’s benchmark), up 114 per cent and 75 per cent respectively.

But over shorter timeframes performance has come off the boil. Over three years the trust’s net asset value (NAV), up 28 per cent, is slightly ahead of benchmark gains of 26 per cent, but on a one-year view the NAV has lagged, up just 1 per cent versus 8.5 per cent.

The trust, along with other small-cap specialists, suffered in the immediate aftermath to Brexit. Both Acorn’s NAV and its share price fell sharply. Initially investors held their nerve – at the start of July the trust was trading on a small premium – but fast forward two and a half months later the trust finds itself on a 10 per cent discount, despite its NAV bouncing back from a post-Brexit low of  322p to 380p. The share price has lagged the recovery, rising from 318p to 346p. 

As the shares of investment trusts are subject to supply and demand, Acorn’s widening discount will have in all likelihood been driven by investors choosing to rotate out of small-cap trusts following Brexit. As previously highlighted, other small-cap trust discounts have widened across the board, including Standard Life UK Smaller Companies, BlackRock Smaller Companies and Montanaro UK Smaller Companies, so Acorn is not alone in being given the cold shoulder by investors.

At a 10 per cent discount, versus a 3 per cent one-year average, Acorn is offering investors the chance to buy at a time when its share price is markedly different from the net value of its underlying assets.

Darius McDermott of FundCalibre is a fan of the trust, which is co-managed by Premier and Unicorn. The Unicorn team are specialists in the small-cap segment of the trust, which accounts for 72 per cent of its assets at present. Premier's Paul Smith manages the remainder of the trust, the bulk of which is fixed income.

‘It's a great little trust and has a decent yield too of around 4 per cent.There is a continuation vote next week (end Sept), but the trust has a great track record and we expect it to go smoothly. If it does, then it is definitely worth considering,’ says McDermott.

‘The fixed income element of the portfolio dampens down the overall risk – and has done significantly so in the past – but that said, it may be too punchy for most post-retirees, apart from perhaps those still in their early sixties who are looking for income and growth. For younger investors, it could be a great investment in terms of total returns over the very long term.’

HOW WE FIND INVESTMENT TRUST BARGAINS

For the sake of simplicity, rather than using technical measures such as the 'Z score', in this column we will identify bargains by comparing current discounts with their 12-month averages.

Only those trusts with a wider discount than their average are considered. We will also look at the overall sector and the quality of the trust, and then take a view on whether the discount looks a good opportunity.


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