Page 10 - DIY Investor Magazine - Issue 25

Firstly, successful trusts grow over time – either through performance or equity raises - and the band will contain some future successes; however it will also contain trusts that have been perennial poor performers and have shrunk.
Secondly, there are a number of idiosyncratic trusts that target a small pool of investors or with large family holdings, some of which have performed poorly.
CONCLUSIONS
Smaller trusts tend to trade on wider discounts, which is at least partly explained by their larger spreads; plenty of individual trusts buck these trends and by doing so they grow and attract a wider circle of buyers.
Trusts which are doing poorly tend to fall in size or struggle to grow and average performance, discount and liquidity for small trusts is biased downwards.
What this really means is that this is a very exciting place to be looking for investments - hidden in the crowd are the large trusts of tomorrow.
That certain types of investor simply can’t invest at this size means that there is a greater chance to get in early and potentially enjoy the best returns, perhaps super-charged by a wide discount due to lower liquidity in this part of the market.
Seemingly intractable discounts on strongly performing trusts may become more pliable when the trust hits a certain level of assets; detailed research is key to getting this right as investors look for differentiated strategies, able to excite investors as long-term plays.
Alternatively investors could look for trusts which do similar things to their larger peers, but have fallen out of favour or made some mistakes; this situation could be a potential turnaround story.
If not, a wind-up or merger could occur, offering the consolation prize of an exit close to NAV or a narrowing discount after a successful merger; here are some trusts below £200m we think are worth consideration.
SUB-£100M
AIE
Ashoka India Equity (AIE) - by some way, the best-performing India trust since in July 2018 (see our recent note). It’s net assets are just £73m but, prior to the corona virus crash, traded on a premium, regularly issuing shares.
As India struggles with the pandemic, AIE currently sits on a small discount of c. 2.8%, which is much tighter than its peers focusing on the country, which suggests investors are in or the long term; the spread is modest at c. 2.9%, and we expect the board to continue to grow the trust once the premium returns. The trust has a performance fee only structure which limits
the drag on the performance of small funds, as well as the hit shareholders bear from fixed costs making up a greater percentage of net assets.
HOT
Henderson Opportunities Trust (HOT) invests in small and mid-cap UK equities with a contrarian approach; it has an excellent long-term track record, but has struggled over a five year horizon.
The trust has £78m in net assets and a market cap of just £64m; structural gearing is high so the trust has suffered in market crashes, such as earlier in 2020.
HOT is very much a risk-on trust - in the 2013/4 mid-cap rally the trust did exceptionally well, even trading on a premium. With the UK market out of favour, and the economic outlook poor, it currently trades on a 14% discount; timing is key with an investment in HOT as it is highly geared to a UK recovery.
It’s wide spread of c. 7.3% might make it even more important to invest with a long-term view, but the level of discount, to
an already out-of-favour asset class, suggests there could
DIY Investor Magazine | Sept 2020 10