In a clothing store, the reduced rail is always my first destination. But my enthusiasm for a bargain is tempered by skepticism. The items may cost less, but they also have to be the pieces my wardrobe needs, rather than impulse buys.
The same considerations apply when considering additions to my portfolio.
The average discount of a mutual fund – the difference between the share price and the net asset value (NAV) – is about 15 percent, the worst since the height of the global financial crisis. At the end of 2021, this was an average of 2 percent.
Does this represent a bargain better than anything available on the high street this month?
Experts may attribute the gap to factors such as high inflation and rising interest rates rather than the quality of the trusts’ holdings. However, the level of the discounts remains worrying.
Some commercial real estate trusts have a discount of more than 40 percent, due to concerns about office building occupancy and similar issues. There is an average discount of 17 percent in infrastructure trusts that support bridge, hospital, road and other projects.
HICL Infra, for example, has a 23 percent discount. Discounts on private equity trusts range from 20 percent to 50 percent, reflecting concerns about their stakes in private, unlisted companies.
Listed on the FTSE 100, Scottish Mortgage may contain tech stocks that have boomed this year, such as ASML, Nvidia and Tesla, but 30 percent are in Space X, the rocket group and other private companies. As a result, the former high-flyer is getting a 22 percent discount, a source of chagrin for investors like me. These terms suggest that anyone fond of a price cut should be patient.
Trust managers can try to mitigate the problem through solutions such as buying back their trust’s shares. However, the hoped-for share price increase could not materialize.
Emma Bird, an analyst at Winterflood Securities, says discounts can create opportunities, but for long-term investors.
She says: “Such investors may well benefit from a double whammy of improving NAV performance and tightening discounts when investor sentiment improves. In particular, interest-rate sensitive asset classes such as infrastructure, real estate and private equity are likely to benefit once interest rates spike.”
But Bird adds: “Any additional uncertainty about continued inflation, the corresponding interest rate path or a deterioration in broader economic performance could further dampen sentiment in the near term.”
James Carthew of Quoted Data, the analytics company, thinks price drops are overdone. Still, he feels they are reinforcing themselves as nervous investors sell out. Some believe that NAVs are not necessarily an accurate picture, which means discounts should be even wider.
Meanwhile, asset managers, responsible for billions, are leaving as the rules require them to invest only in substantial funds with sufficient liquidity, which excludes smaller trusts.
Carthew says, “As a result, there could be more consolidation, with smaller trusts looking to merge or liquidate and money flowing back to investors.”
He thinks bargain hunters should exercise caution, but also remain aware that there are opportunities ahead, citing Next Energy Solar, the renewable energy company with a 19 percent discount — and another Footsie name: Pershing Square Holdings.
This American trust is run by billionaire Bill Ackman, the hedge fund manager who shares his views with 749,000 Twitter followers. Pershing is discounted by 36 percent despite its performance — it returned 35 percent last year, against 10 percent of the S&P 500 index — and its holdings, such as Alphabet, the Google group and the fast food chain Chipotle.
Carthew, who is an investor, says Ackman’s astuteness is illustrated by his sometimes “spectacularly profitable” bets on derivatives.
Alan Brierley and Ben Newell, analysts at Investec, say Pershing is a “unique and compelling investment proposition” that is “fundamentally mispriced.”
Part of this confidence is because Ackman has his own “skin in the game.” The management team owns approximately $1.4bn (£1.1bn) of shares in the trust. However, anyone interested in it should note that even after a series of redemptions, the discount is high.
Currently it cannot be marketed in America; if this can be changed, the discount could get smaller given Ackman’s fan base. But that process will not be instant.
This underscores the downside of investing money in discounted trusts.
While it is a means of acquiring assets for much less, there is no guarantee of immediate profit.
I will deposit money into trusts like Pershing and HICL, but in small monthly amounts, not a substantial commitment, regardless of my penchant for bargains.
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