There is an old saying in the City: unit trusts get sold; investment trusts get bought.
The meaning of the old saying is not immediately apparent because there is a bit of word-play going on, so let's decode the adage.
Unit trusts get sold
Who sells them? Why, the fund management companies, of course!
You can hardly turn a page of the Sunday broadsheets' finance pages without stumbling across adverts imploring the reader to invest in one trust or the other, particularly in the run-up to the end of the financial year when the annual independent savings allowance (ISA) runs out.
Likewise, in central London at least, there are adverts on the mainline stations advertising the unit trust products of the big fund managers.
Customers get the hard hard sell because the funds need new investors to provide funds to finance new investments or pay off those investors cashing in their units.
Investment trusts get bought
In contrast, an investor has to be proactive in seeking out an investment trust in which to invest, because they are not heavily marketed.
As such, investment trusts are not sold to the investor; they are bought by those who want exposure to a pooled investment fund (and who do not want to pay the higher fees charged on unit trusts).
The question is: how do you decide which one(s) to buy?
In this article, we'll cover a few tips, focusing on fundamental value, sectors and income.
The NAV lark
An investment trust is a public listed company (PLC), just like, say, Marks & Spencer, but unlike most PLCs the focus is less on the company's earnings per share and more on its net asset value (NAV).
The net asset value per share is the value of all the assets owned by the investment trust (adjusted for cash and debt) divided by the number of shares in issue.
If the NAV per share is above the current share price, the shares are said to trade at a premium to NAV.
If they trade below the NAV, they trade at a discount.
In a perfect world, this would not happen but investment trust shares are subject to the same laws of supply and demand as any other type of share.
If there are more buyers than sellers, the shares will go up and will end up trading at a premium to NAV; if there are more sellers than buyers, the reverse applies.
Supply and demand may fluctuate depending on the track record of the investment trust, and maybe the area of focus of the investment trusts – its sectors or geographies, or both.
Sometimes a NAV will detach itself by some distance from the underlying share price because of the nature of the things the trust invests in, such as private companies or illiquid investments in emerging countries.
As such, it does not necessarily follow that an investment trust trading at a big premium to the current share price is overpriced.
Take, for example, the Foresight VCT planned exit shares (LON:FTVP), which trade at 1.5p but which have a NAV per share of 0.09p.
The venture capital trust's (VCT) focus is on unquoted companies within the renewable energy and recycling sector.
It's premium to NAV is a mind-boggling 1,572%, making it far and away the most (ostensibly) overpriced trust in our universe, but who really knows the value of the assets it has invested in?
Generally, the valuation of an unquoted company remains unchanged for ages until a similar company gets sold off, thus supplying some sort of benchmark or rule of thumb.
Ranking the trusts by the premium to NAV gives the following top five (or bottom five), with an indication of their area of focus:
- Foresight Venture Capital Trust (LON:FTVP): premium of 1,572%; VCT generalist
- Cambria Africa plc (LON:CMB): premium of 289%; Zimbabwean private companies
- All Asia Asset Capital Ltd (LON:AAA): premium of 304%; Asia Pacific excluding Japan
- Secure Income REIT PLC (LON:SIR): premium of 260%; UK property
- British & American Investment Trust PLC (LON:BAF): premium of 117%; UK equity income
I shall just mention in passing that if you think investing in unquoted companies is high risk, spare a thought for investors in Cambria Africa, a trust that is trying to back private companies in the extremely volatile environment that is Zimbabwe.
The five trusts showing the highest discount to NAV are listed below:
- Foresight VCT Infrastructure (LON:FTVI): discount of 95%; unquoted UK infrastructure companies
- Origo Partners PLC (LON:OPP): discount of 92%; unquoted interests, and illiquid, publicly traded, equity interests, in companies principally based or active in China and Mongolia
- Infrastructure India PLC (LON:IIP): discount of 90%; Indian infrastructure assets, especially energy and transport companies
- South African Property Opportunities Plc (LON:SAPO): discount of 74%; South African property
- Dolphin Capital Investors Ltd (LON:DCI): discount of 67%; European property.
Before you rush off and invest willy-nilly on those trusts that are trading on the largest discounts, be aware that these large disparities often exist for a reason, so do some research. You can generally find out what the top 10 investments are held by each trust from its stock exchange announcements, but best of luck with finding out the true value of those investments if they are unquoted.
So, let's delve a little deeper and see if we can make things a little easier.
The world is your lobster, my friend
As per unit trusts, investment trusts have the option to focus on a particular sector (e.g. electronics, property) or a particular part of the world (e.g. Asia, emerging markets).
As we can see from the list of investment trusts above, some trusts combine a sector focus with a geographic region (e.g. South African property).
There are almost 80 categories to choose from when screening investment trusts and we do not have the space to go through all of them, so let's choose just a few and look at those that, based on their discount to NAV, appear to be cheapest.
Starting with the big names that invest in anything (and everything), let's look at the Global sector.
- Hansa Trust PLC (LON:HANA): discount of 28% for the “A” shares and 24% for the ordinary shares
- Caledonia Investments PLC (LON:CLDN): discount of 19%
- Majedie Investments PLC (LON:MAJE): discount of 11%
If trusts focused on the UK are more your bag, here's the three UK-focused trusts with the highest discount to NAV:
- LXB Retail Properties PLC (LON:LXB): discount of 28%
- SVM UK Emerging Fund PLC (LON:SVM): discount of 26%
- Gresham House Strategic PLC (LON:GHS): discount of 24%
Backing North America? North Atlantic Smaller Companies Inv Tr PLC (LON:NAS) trades on a 21% discount.
Japan? Small cap-focused Atlantis Japan Growth Fund Ltd (LON:AJG) at a 10.8% discount just shades Aberdeen Japan Investment Trust (LON:AJIT) and its discount of 10.5%.
Global emerging markets? Check out Ashmore Global Opportunities Ltd (LON:AGOU) and its discount of 37%.
Earnings may not be important but income is
Earnings per share may not be particularly important when assessing investment trusts, but the dividend is, especially if you are looking for income, so we'll end this dip into the world of investment trusts with a look at the top three yielders:
- Northern Investors Company PLC (LON:NRI): 13.6%
- Ranger Direct Lending Fund PLC (LON:RDL): 13.5%
- Chrysalis VCT PLC (LON:CYS): 13.5%