Valuation, Innovation and Consolidation in Investment Trusts

2012 REVIEW: Investment trusts saw notable discounts among European equity funds, some innovative--and altruistic--launches, and consolidation among players; what's in store for 2013?

Jackie Beard, FCSI 4 January, 2013 | 5:35PM
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As we look back at 2012, it’s encouraging to see that overall, discounts in the investment trust sector have narrowed. There are most likely a number of reasons for this: increased interest, more proactive boards—spurred on by some proactive shareholders, recognition of good performance, and income-seeking investors, to name but a few.

Widening Discounts on European Equity Funds

Discounts can oft be cited as a reason not to look at investment trusts. But they can provide an investor with the opportunity to buy assets for less than they’re worth, and if sentiment is against a particular area or sector that difference can be wider than average. Let’s use European equities as an example. This was an area that was out of favour with many in the first part of 2012 and discounts on European equity investment trusts widened out in the early months. But there are some high quality managers running these funds—most of whom are well-known in the open-end sector and, indeed, rated positively by Morningstar at both their open-end funds as well as their investment trusts. Take Sam Morse at Fidelity. He runs both Fidelity European Values (FEV) and Fidelity European. The trust started trading last year at a discount to its NAV of more than 14%. At the end of 2012 this had narrowed to just under 10%. Not only that, but the trust also performed better than its OEIC counterpart. So investors in the trust had the double-benefit of better performance and a tightening discount.

New Launches, New Assets

As a sector, we saw nearly £1 billion of new money come into investment trusts in 2012. That’s chicken-feed when compared with open-ended funds, which topped EUR 170 billion of inflows across Europe, but nonetheless it shows there is life in the sector yet. We saw only a few plain vanilla equity funds launched or raising assets—BlackRock North American (BRNA) and Diverse Income Trust (DIVI) being two exceptions; rather, it was the alternative asset funds that gained more interest—GCP Infrastructure (GCP) and Doric Nimrod (DNA).  

An Innovative and Altruistic Fund?

One fund that did capture a lot of attention was BACIT (Battle Against Cancer Investment Trust). This fund launched in November 2012 and it’s a new breed of fund, the likes of which we haven’t seen before in the UK. The brainchild of Tom Henderson, it’s a fund of funds that invests in both long-only and alternative funds. That’s not what sets it apart from its peers, though. The management team are giving their services for free, so there’s no annual management charge. Further, Henderson himself is meeting certain running costs of the fund. Instead of paying a management fee, the fund will pay 1% of its NAV, on an annual basis, to a mix of charities, including the Institute of Cancer Research. So investors can feel good about their investment and also—hopefully—profit from the skills of a strong management team.

Industry Consolidation

We also saw a modicum of consolidation among investment trusts, for example Troy Income & Growth (TIGT) acquired the assets of Grampian and Albany. We think this is a trend that should continue into 2013, not least because of the efficiencies of scale that a larger pot of assets can offer its shareholders. We know already that the wealth management firms are fans of investment trusts, but for them to use trusts for their clients requires that the funds be of sufficient size. The introduction of the RDR is a good time for boards to reassess their offerings and make sure they’re doing what they should, in the most efficient way. Granted, this requires directors be prepared to stand down when funds consolidate, but with increasing attention on fees and their exponential impact on a small pool of assets, it’s only right that boards consider fund mergers where the fund size just isn’t viable for the fees being charged.

Rosy Outlook

We think the outlook for investment trusts this year is encouraging. There’s no doubt there’s greater interest in the sector; the amount of press coverage has increased considerably in the last 12 months and we think this is likely to continue. We now have 85 investment trusts carrying a Morningstar Analyst Rating. A number of the highly-rated funds are trading at a premium, in part because of their solid income commitments which are backed by well-stocked revenue reserve accounts, and we would always caution investors against paying over-the-odds. Nonetheless, there are opportunities to be found. Use our Investment Trust Screener and Quickrank tools to find such opportunities for your portfolio.

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.

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About Author

Jackie Beard, FCSI

Jackie Beard, FCSI  is Director of Manager Research Services, Morningstar EMEA

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