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7 Cheapest Gold Rated Investment Trusts

It is getting more difficult to snap up closed-end funds on the cheap, as discounts narrow following a significant stock market rally

Karen Kwok 3 April, 2017 | 10:49AM

Developed market indices hit all time highs in March, driving discounts on close-ended funds to their narrowest level in 15 years. Investment trusts are trading at an average of 5% discount today, moving from an 11% discount directly after the Brexit vote, according to a report issued by an investment firm Stifel. Among the 33 investment trust sectors examined by Stifel, a third of them have seen discounts narrow to less than of 2%. Investors interested in adding closed-end funds to their portfolio are in danger of missing out on a bargain if they do not act promptly.

The S&P 500 hit all-time high at 2,395 on March 1, while the FTSE 100 reached its highest level at 7,429 on March 20. The FTSE 250, which includes smaller and more domestic-focused companies in the UK, also hit its highest level of 19,151 last month.

“The narrowing of discounts reflects supply and demand dynamics for trust shares in the market, with investors being net buyers of shares against a background of strong stock market return. Following the EU referendum investors have generally seen strong returns from many investment trust sectors with a combination of forex gains, buoyant stock markets and discount narrowing being a perfect cocktail to generate some strong capital gains,” said Stifel.

The other driver of narrowing discounts in investment trusts are increasing use of discount control mechanisms and other measures to enhance shareholder value, Stifel added.

Infrastructure Trading at Highest Premium

The narrowing average discount has also been boosted by the increased number of infrastructure and renewable energy funds which are now trading on the highest premium across all sectors. These sectors now make up 11% of the total sector market cap, Stifel said.

US President Donald Trump’s promise to increase infrastructure spending, alongside the UK Chancellor Philip Hammond’s similar plans, have created a solid backdrop for investment in infrastructure assets. Investors, keen to profit from the politics, are buying infrastructure funds. This rise in demand has meant infrastructure trusts are trading at the highest premium across sectors at 10.2% in March.

Amongst the infrastructure sector, the largest premium on a trust is 20.6% and the lowest premium is 7.9% in the last 12 months to March.  The renewable energy sector is trading at 9% premium.

Data from Morningstar Direct showed that among Gold Rated funds by Morningstar analysts, Gold Rated Scottish Mortgage (SMT) and Gold Rated Baillie Gifford Japan (BGFD) are trading at the highest premium at 3.5% and 3.3% respectively.

Scottish Mortgage was on a 5% premium last week after joining the FTSE 100, compared with an average 2% premium, Stifel said. Another trust Monks (MNKS) has also seen demand tighten the discount, currently at 2%, compared with a 12-month average of 9%. This fund is Bronze Rated by Morningstar analysts.

Commodities Trading at Discount Despite Rally

Commodities and natural resources trusts are trading at an average 18.1% discount, the highest discount across sectors, despite of their gains in 2016. Commodities were the best performing sector in 2016, with Silver Rated BlackRock World Mining (BRWM) topping the best performing investment trusts in 2016. The fund gained 100% in 2016. It is currently trades on a 14.7% discount.

The trust’s performance longer term has been more volatile and over a 10-year period it has annualised returns of 2%. This trust carries significant risks, as its holdings incorporate high exposure to movements in base-metal and gold prices, said Fatima Khizou, Morningstar fund analyst. This trust is only for investors seeking dedicated exposure to miners, Khizou added. The management team at the trust is highly experienced and investors here have been well compensated over the long term, said Khizou.

Political Headwinds for European Trusts

Europe and European Smaller Companies trusts were among the cheapest sectors, trading at 7.3% and 10.7% discounts respectively. Ahead of French presidential elections in April, investors are feeling nervous of European equities. UK investors’ appetites for Eurozone equities remain at the lowest level relative to other asset classes, according to the latest Lloyds Bank investor sentiment index.

However, as the European electoral season and the political landscape becomes clearer, the political risk premium on Europe should fade, raising new investment opportunities, European equities team at Invesco Perpetual said in a published note. The more potent driver to long-term equity market returns is not politics, but rather, economic and corporate fundamentals, the note read.

The Cheapest Gold Rated Trusts

Morningstar data showed that seven closed-end funds rated Gold by Morningstar analysts are trading at discounts. Gold Rated BlackRock Smaller Companies (BRSC) offers the largest discount of 17.6%. It follows by Aberdeen Asian Smaller (AAS) that is trading at 14.5% discount.

David Holder, senior analyst with Morningstar said BlackRock Smaller Companies’ performance has been robust over all time frames, together with a solid process and competitive fee structure. The trust aims to achieve long-term capital growth for shareholders through investment mainly in smaller UK quoted companies.

Other Gold Rated investment trusts trading at discounts are Standard Life UK Smaller Companies (SLS), Schroder Japan Growth (SJG), Schroder Asian Total Return Inv. Company (ATR), Jupiter European Opportunities (JEO) and Murray International (MYI). 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Aberdeen Asian Smaller Ord1,079.00 GBX-0.28
Baillie Gifford Japan Ord688.50 GBX2.19
BlackRock Smaller Companies Ord1,192.00 GBX0.08
BlackRock World Mining Trust plc355.25 GBP-0.28
Jupiter European Opportunities Ord702.50 GBX0.07
Monks Ord705.00 GBX0.28
Murray International Ord1,254.00 GBX-0.79
Schroder Asian Total Return Inv. Company323.00 GBX1.06
Schroder Japan Growth Ord200.50 GBX2.23
Scottish Mortgage Ord405.60 GBX-0.59
Standard Life UK Smaller Co. Ord440.00 GBX2.09
About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk