Page 8 - DIY Investor Magazine - Issue 25

UNDERGROUND BANGERS: LOOKING FOR HIDDEN GEMS IN SMALLER INVESTMENT TRUSTS
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Smaller investment trusts have been under pressure with demand reduced by consolidation in the wealth management industry and the increasing use of centralized buy lists by DFMs and advisers.
If a large amount of money is being managed to a model, allocations can be impossible to deal into a small trust; anecdotally, the lower limit of viable size for professionals has been rising with £200m a realistic cut off point, and the lower charges and greater liquidity of larger vehicles makes them more attractive in the current environment.
The COVID-19 pandemic has increased this pressure; concerns about market direction and worsening personal circumstances has reduced the ability or willingness to invest and investment trust industry assets over the first half of 2020 were flat.
DISCOUNT
Smaller trusts offer investors a greater opportunity to buy on a discount; this table sorts all AIC investment companies by net assets, splits them into £100m bins and calculates the average discount for each bin.
The trend line shows a clear relationship between size and discount.
SMALLER INVESTMENT TRUSTS HAVE BEEN UNDER PRESSURE WITH DEMAND REDUCED BY CONSOLIDATION IN THE WEALTH MANAGEMENT INDUSTRY
Average discounts in the universe have risen from c. 1.9%
at the end of January to c. 8.6% by the end of June; wide discounts can bring the long-term viability of a vehicle into play, and the lack of investment demand creates greater competition for capital, potentially further starving the smallest trusts.
However there are many investors, such as wealth managers with greater discretion over which funds they can use and retail investors, who do not have the same liquidity restrictions or requirement to use model portfolios or buy lists.
For them the 50% of investment trusts with less than £200m
in market cap offer opportunities their peers can’t or won’t access; some smaller trusts are clearly differentiated from large trust strategies, offering diverse asset exposure and sources of alpha.
The pandemic could lead to an alternative source of return: wind ups or mergers which close persistent discounts.
The merger of Perpetual Income & Growth and Murray Income show boards are willing to take extreme action; the board of the £24m JPMorgan Brazil has recommended that shareholders vote against continuation at its AGM - rollover into BlackRock Latin American would seem the most likely option.
Small trusts, which are not clearly differentiated, could follow suit if they can’t stand out and grow, either through share issuance or organically thanks to outstanding performance; here we consider some advantages and disadvantages
of smaller trusts, and some funds which stand out to us as offering differentiate strategies with the potential to grow.
DIY Investor Magazine | Sept 2020 8