This article is part of the special series, Investing with ISAs.
One of the features we like about investment trusts is that it’s possible to buy assets at less than they’re worth when a trust is trading at a discount to its net asset value (NAV). Further, that level of discount can vary according to prevailing market conditions.
At Morningstar we’re big believers in investing for the long term but we recognise that the way in which investment trusts trade can give rise to opportunities.
Studies suggest that investment trusts tend to revert to their average discount level over time—not to their net asset value. We can use that average discount figure as a gauge for whether a trust is looking cheap—when its discount is wider—or expensive—when it’s narrower—relative to history. That means that when that discount reverts to the mean, the shareholder gets the benefit of that uplift in NAV, as well as the movement in the share price.
Cheap can be cheap for a reason and it doesn’t always mean the fund is a bargain, but it’s a way of looking for opportunities to buy in to some good funds.
The Perpetual Income & Growth Investment Trust (PLI) has tended to trade at a premium to its net asset value in the last year. In the last couple of week, though, we’ve seen it dip to a discount and that should be a signal to take a deeper look, in our view. The fund carries our Gold Morningstar analyst rating and we hold manager Mark Barnett in high regard. The last couple of months have been a little tough for the fund but, given our belief in long-term investing, that doesn’t worry us. It’s rare to see this fund trade at a discount and we think that makes it an attractive candidate for this year’s ISAs.
The Schroder Asia Pacific Trust (SDP) is also trading at a little below its 12-month average discount. Granted, it’s not by much, but the fund holds our Silver rating and it’s a worthy contender for investors seeking Asian equity exposure in their portfolio. Performance hasn’t tailed off here and we’re confident in manager Matthew Dobbs.
The Scottish American Trust (SCAM) is another fund we rate highly—it carries our Silver rating. The fund has averaged a modest premium over three years and over the last 12 months that premium has been a little higher still. At the time of writing, the fund is trading at a modest discount to NAV. We’ve noticed, too, that three of the directors have been buying shares since the end of last year. While they don’t always get it right from a timing perspective, we think it shows a belief in the fund and its strategy, as well as recognition of an opportunity from a timing perspective.
The JPMorgan Emerging Markets Trust (JMG) carries our Bronze rating. It’s run by Austin Forey at JPMorgan and he’s supported by a strong and well-resourced analytical team. What’s more, the trust consistently outperforms the open-end version of the fund—something we closed-end fund analysts always like to see. The trust does not use gearing so it’s not taking on added risk to generate those extra returns. The discount at which it trades tends to revert to less than 9% so the fact it’s tipped over 10% on March 13th means there’s the potential to get a little extra uplift in your investment.
To be clear, we believe in making investment decisions with a long-term view. But it doesn’t hurt to look for a little extra value when you can find it.
Explanation of Morningstar's Analyst Ratings
Morningstar’s fund ratings range from Gold to Negative. The ratings indicate whether Morningstar analysts are optimistic about a fund’s future performance. A Gold rating indicates Morningstar analysts think highly of a fund and expect it to outperform its peers and relevant index over a full market cycle of at least five years. Silver and Bronze ratings also indicate positive sentiment from Morningstar analysts. A Neutral rating indicates that Morningstar analysts believe a fund isn’t likely to deliver standout returns but also isn’t likely to significantly underperform. A Negative rating indicates Morningstar analysts believe the fund is inferior compared to its peers and has at least one flaw that is likely to significantly hamper future performance.
