Emma Wall: Hello and welcome to the Morningstar series, Ask the Expert. I'm Emma Wall and here with me today is Morningstar Analyst, Szymon Idzikowski.
Hello, Szymon.
Szymon Idzikowski: Hi, Emma.
Wall: So we're here today to talk about discounts on investment trusts. Unlike unit trusts, which can issue more units with demand, investment trusts – depending on demand – either trade at a discount or a premium. A discount isn't always necessarily an entrance point though for investing, there are other things that should be considered, aren't there?
Idzikowski: Yeah, it's probably sort of a double edged sword. In one way, people could argue that discounts and premiums add volatility, on the other hand, they can create opportunities. But as you've pointed out, we would never encourage people to buy funds only because they trade at a discount. There should be some merits behind that. So maybe one way to look at this, is to look at our Medalists [funds rated Gold, silver or Bronze by Morningstar analysts] that would indicate high quality companies; and then maybe use discount as a way to time your buy decision.
Wall: So making sure you are buying quality at the right price then?
Idzikowski: Correct.
Wall: Well have you got one of these examples then for us, an investment trust that Morningstar analysts rate highly but is also at a discount at the moment?
Idzikowski: Sure. Well, if you think about opportunities and maybe a little bit contrarian investing, I couldn't avoid talking about emerging markets. They still trade at wide discounts. However, their fortune seems to be turning back. So, emerging markets bounced back this year. The MSCI Emerging Markets is actually marginally ahead of the S&P 500; it is marginally ahead of the FTSE also. They are getting more traction. But it's still not reflected in discounts. You can still find good opportunities trading below the long-term average discounts.
I think JPMorgan Emerging Market (JMG) is such an example. It's a fund we actually rate Bronze. It is run by an experienced fund manager, Austin Forey. He has been in charge of this fund for over a decade. He has been actually with JPMorgan for well over two decades. And he has got great support from a well-resourced team, and we believe he really used those resources to a great extent.
So, actually, if you look at the track record of the fund, over the tenure of Austin Forey, it's returned over 8 percentage points annualised, which is more than 3 percentage points more than its peers.
But then actually, last year has been a bit tricky for the fund. So in 2013, the fund was – it didn't hold Internet stocks; it was actually overweight Brazil, South Africa, and India, which held the fund back a little. But that's probably created some opportunities for people that would like to buy it with long-term view.
Wall: And it's all about that, as you say, being brave as an investor and taking a contrarian view and taking a long-term view just because someone underperforms one year. As you say that the track record of 8% annualised, one bad year is not so bad. Have you got a second example then for us?
Idzikowski: Well, a second example might be is a little bit more extreme, speaking of one single bad year. So, British Empire Securities (BTEM) is a global equity fund. It is sort of like a deep value investment. Last year was actually quite bad if you compare to category peers. So the fund returned about 8 percentage points, which is probably 15 percentage points less than its category peers. But as you said, one year doesn't dent our view.
What happened last year is the fund didn't hold Japan and didn't hold US equity, which were two of the best performing markets. It held too much cash for too long in the rising markets, and it had a couple of gold mining companies, which performed very bad. But as I say, this is sort of like a deep value investment. It invests in out-of-favour companies that are either misunderstood or under researched and the team is trying to find the hidden value.
So by nature, actually, they don't invest into US because it is considered to be one of the most efficient markets. Japan, they just didn't see catalysts at that time, and they tend to hold cash on their balance sheet as sort of contrarian investors. So as I said, one year doesn't dent our view. We like that they actually stick to their expertise and they have proven they can add value over a long time.
Wall: One perhaps though for a satellite position in your portfolio rather than a core, that's for opportunity.
Idzikowski: Yes, that probably wouldn't be a core holding.
Wall: What's the third example?
Idzikowski: Well, the third example is Jupiter European Opportunities (JEO). This fund trades at a much smaller discount, around 3 percentage points. But again, given that over the last six months, it has been actually trading at a premium, we believe this is quite an attractive entry point. Again, we've got a very experienced fund manager, Alexander Darwall, experienced and pragmatic. You've got a tried and tested process that has delivered over long-term.
Wall: Szymon, thank you very much.
Idzikowski: Thanks for having me.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
