Long- and short-term reasons lie behind the trend and there are surprising quirks such as the popularity of UK equity trusts despite Brexit delays
Despite Brexit fears and China's slowing growth dominating headlines in the first quarter of 2019, discounts across the investment trust sector have continued to narrow: at the end of March, the average discount stood at 3.8%,1 down from 4.4% at the start of the year, marking a historically tight level.
Investment companies trade at a discount when the share price of the trust is lower than the company's net asset value. If and when a discount narrows, investors can achieve a return that is better than the performance of the underlying assets.
And in the short term at least, the main driver of narrowing discounts in the sector this year has been rising markets, leading a number of investment companies to outperform in the first few months of the year. However, this tightening is also part of a long-term trend according to the Association of Investment Companies (AIC), which notes the average discount stood at 15.6% at the end of February 2009.2
Meanwhile, the growing popularity of higher yielding alternative assets also assisted the sector's profile in the first quarter of the year, with demand for these assets stronger after what was arguably a dismal year for them in 2018. This has been reflected in the gains many infrastructure trusts have seen over the past 12 months, with premiums growing from 7.9% to 8.6% since the end of last year.3 Similarly, renewable trusts are trading on a premium of 8%, up from 5.5%, whilst the private equity sector saw the sharpest narrowing of discounts by 7.5% year-to-date.4
UK assets
Perhaps the most surprising trend over the last few months has been the continued popularity of UK equity trusts despite the ongoing delays over the UK's exit from the European Union and the level of outflows suffered by their open-ended counterparts, according to Simon Elliott, head of IT research at Winterflood.
For example, even though the UK Equity Income sector is still trading at a discount, the figures have narrowed from 6.1% over the past year to 3.2%,5 and according to AJ Bell's personal finance analyst Laura Suter, the asset class remains a "perennial favourite" with advisers.
Yet worries over Brexit and the ongoing decline of a number of UK High Street names has led to a number of difficulties for property trusts, and the sector has seen average discounts widen to 7.3% from a 12-month average of 2.8%, as investors fear highly-geared real estate trusts could be burnt as a result of a potential ‘no-deal' exit from the EU.
In spite of these concerns, there is an argument to be made for property trusts as an alternative to open-ended property funds, which in the immediate aftermath of the 2016 Brexit vote were forced to close due to the large number of redemptions from investors. And whilst closed-ended property trusts may see shares fall in the short term, there is the possibility of a rebound if Theresa May's government is able to achieve a somewhat ‘softer' exit. This combined with the income draw of property trusts - the average trust is still yielding 4.6% - means the sector could still represent value for those willing to invest.
1 Source: Thomson Reuters and Winterflood. 2 (ex. 3i and VCTs). 3 Source: Numis. 4 Source: Aberdeen Standard Investments. 5 Source: AJ Bell
