3 Top Rated Trusts Trading on Double Digit Discounts

Closed-end funds invested in UK stocks are suffering from falling investor confidence as Brexit negotiations rumble on, potentially creating investment opportunities

David Brenchley 26 March, 2018 | 8:06AM

UK focused investment trusts are trading on a discount thanks to Brexit pound sterling Britain investing

UK stocks are out of favour with investors – potentially creating significant investment opportunities for the savvy contrarian.

Funds in the Investment Association UK Smaller Companies sector have seen more than £1 billion outflows since June 2016. But it is not just open-end funds that are being cast aside.

Many investment trusts in the Association of Investment Companies UK Smaller Companies sector have slipped to discounts since the EU referendum. While performance has been compelling, a number of trusts in the sector have stayed on big discounts.

Despite this pessimism, many investment professionals have remained constructive on the UK, and mid and small firms in particular. Sentiment is now so low, suggests Sheridan Adnams, investment manager at The Share Centre, that this might be a good entry point for contrarian and value investors.

Smaller companies are more sensitive to the UK domestic economy. While this has been a headwind for them due to the UK’s underperformance on the world stage, that may be set to change. Inflation is widely expected to fall, with the hope wage growth can in turn pick up and turn real inflation positive. And smaller companies have proven their ability to outperform their larger counterparts over longer timeframes.

We reveal three Morningstar Gold and Silver Rated investment trusts that currently trade on double-digit discounts.

BlackRock Smaller Companies (BRSC)

The Gold Rated BlackRock Smaller Companies currently trades on a 11.2% discount. Its 12-month average discount is 12.9%, and its 10-year average discount is 14.6%. The trust fell to a discount of nearly 20% in late 2016, but has narrowed significantly since. The share price has risen 47% since EU referendum day.

The trust is run by Mike Prentis, who looks for sustainable growth opportunities that meet five key criteria: quality management, strong market position, cash generation, a prior record of earnings per share growth and a strong balance sheet.

It can invest up to 50% in AIM-listed companies, which Morningstar analyst David Holder thinks is a sensible decision as it allows Prentis to run his winners for longer.

Its two top holdings, accounting for 4.5% of assets, are veterinary services and products providers Dechra Pharmaceuticals (DPH) and CVS Group (CVSG).

Holder says Prentis is “an extremely capable pair of hands with a strong team to support him”. “His experience in smaller companies investing is arguably more important than might be the case in other parts of the market… and is a driving factor for our continued conviction here.”

Henderson Smaller Companies (HSL)

Neil Hermon’s Silver Rated Henderson Smaller Companies trust is also on a narrower discount to its history, at 10.6% currently. That compares to a 12-month average of 12.8% and 10-year average of 16.9%. In the depths of the financial crisis it reached as much as 40%.

Performance has been slightly less impressive than its BlackRock counterpart, but 35% marks a decent share price return. That said, Holder cautions that investors need to be mindful of the volatile nature of returns.

The fund’s largest holding is in FTSE 250 housebuilder Bellway (BWY), with asset manager Intermediate Capital Group (ICP) and engineer Renishaw (RSW) next up. Returns have been helped by the meteoric rise of UAE-focused healthcare provider NMC Health (NMC), which looks like being sold down after its promotion to the FTSE 100.

Holder, who recently upgraded HSL from Bronze, says: “We think that the fund is a strong candidate for those investors seeking exposure to a broad range of UK smaller companies from AIM through to the FTSE 250.

“The team is stable and the manager vastly experienced, which leads to a consistent and effective approach.”

Aberforth Smaller Companies (ASL)

Aberforth Smaller Companies is a differentiated offering within the small-cap space. It favours undervalued companies, giving it a value-style approach. As a result, returns are likely to be lumpy. The Silver Rated trust is the worst performing of the three mentioned here since June 2016, returning 21% in share price terms.

Its current discount stands at 10.6%, with the 12-month average at 12.1% and the 10-year average at 11.5%.

The fund has six investment managers without one named lead manager. The team has seen some turnover recently, but analyst Samuel Meakin hopes now to see some stability.

The managers are strong believers that the small-cap space has pricing anomalies and look to identify companies that are trading below their intrinsic worth. They are valuation-sensitive, but also look at a firm’s competitive position, barriers to entry and management track record.

Top holdings as at end February include ceramics company Vesuvius (VSVS), photography equipment provider Vitec (VTC), asset manager Brewin Dolphin (BRW) and property developer Urban & Civic (UANC).

Despite often suffering periods of underperformance, Meakin says long-term returns have been strong.

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
Aberforth Smaller Companies Ord1,136.00 GBX-0.70
Bellway PLC2,491.00 GBX-2.96-
BlackRock Smaller Companies Ord1,170.00 GBX0.00
Brewin Dolphin Holdings PLC318.80 GBX-1.30-
CVS Group PLC666.00 GBX0.53-
Dechra Pharmaceuticals PLC2,142.00 GBX-0.19-
Henderson Smaller Companies Ord740.00 GBX-1.60
Intermediate Capital Group PLC954.50 GBX-1.14-
NMC Health PLC3,062.00 GBX-0.91-
Renishaw PLC3,898.00 GBX-0.51-
Vesuvius PLC490.40 GBX-2.31-
Vitec Group (The) PLC1,195.00 GBX0.00-

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk