The current stock market downturn has taken its toll on the price of investment trusts. According to data from Trustnet, over 80% of investment trusts are currently trading at a discount compared to their underlying assets. This could create a buying opportunity for people looking to invest their ISA allowance for the current tax year.
Kyle Caldwell from Interactive Investor comments that value-focused trusts “expected to perform well or protect capital in a high inflation and rising interest rate environment have seen an uptick in investor demand”. However, the reverse has been true for growth-focused trusts.
I’m going to explain what to consider before investing your ISA allowance in trusts, together with a selection of trusts currently trading at a discount.
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What do you need to know about investment trusts?
Investment trusts are listed on the stock exchange, so you buy and sell at live prices. As with funds, trusts invest in a range of underlying assets (such as shares), and their value is referred to as their ‘net asset value’.
A trust’s share price is measured against its underlying asset value to see if it’s trading at a ‘discount’ or a ‘premium’. So, if its share price is 95p and the net asset value is 100p, then the trust is trading at a 5% discount, meaning the asset is worth more than its share price.
Is buying discounted trusts a good ISA investment strategy? That really depends. Henry Ince from Hargreaves Lansdown comments that trusts trading at a discount “can signal opportunity since the shares can be bought at a lower value than the worth of the underlying investments.”
However, a discount can reflect negative investor sentiment towards that sector or trust, which can lead to the discount widening further.
Top 10 investment trusts for bargain hunters
Interactive Investor identified the following funds for potential ISA ‘bargain hunters’, having recently switched from trading at a premium to a discount:
Investment trust (and ticker)
Premium (start of 2022)
Discount (current)
JPMorgan Asia Growth & Income (JAGI)
1.2
-11.4
Edinburgh Worldwide (EWI)
0.6
-11.2
Allianz Technology Trust (ATT)
1.3
-10.4
Syncona (SYNC)
6.4
-8.8
RTW Venture (RTW)
4.1
-7.6
Baillie Gifford US Growth (USA)
0.8
-7.5
JPMorgan US Smaller Companies (JUSC)
1.1
-6.2
Baillie Gifford Japan (BGFD)
1.9
-4.5
Baillie Gifford Shin Nippon (BGS)
1.1
-2.2
JPMorgan Claverhouse (JCH)
0.2
0.3*
*currently trading at a small premium
In terms of overall trends, Kyle Caldwell comments that “Unsurprisingly, given its focus on high-growth stocks and technology, most Baillie Gifford trusts have become cheaper.” Allianz Technology and Edinburgh Worldwide have also been hit by the tech sell-off. Three trusts invest in Asia, which has also been impacted by rising interest rates and geopolitical uncertainty.
What can we learn about the top three trusts?
1. JPMorgan Asia
JPM Asia has consistently traded at a 5%-10% discount over the last five years, according to Trustnet. It’s been a solid performer, delivering a five-year return of 43% compared to 33% for the sector. However, its fortunes have reversed in the past year, making a loss of 28%.
Andrew Pitts from Interactive Investor commented that “much of [the loss] can be attributed to the trust’s exposure to out-of-favour China.”
Thomas McMahon from Kepler believes it’s a “great option for core, long-term Asia exposure for investors with either a growth or income objective.” He also points out that the trust’s exposure to growth brings a higher sensitivity to rising interest rates.
2. Edinburgh Worldwide
Nearly 70% of Edinburgh Worldwide is invested in the US, with its largest holdings in Tesla and Space Exploration Technologies. Trustnet reports that it had a stellar 2020, delivering a return of 88%.
But, due to the US technology sell-off, it’s crashed by 44% in the last year. As a result, it’s currently trading at its highest discount in nearly five years (excluding a brief dip during the pandemic).
James Carthew from QuotedData, commented that it’s still “the best performing of all global trusts over [five years] barring Scottish Mortgage”.
3. Allianz Technology Trust
Allianz Technology Trust has mostly traded at a 5% discount to premium over the last five years, according to Trustnet. It’s another consistent performer, delivering a five-year return of 167%.
However, its share price has plummeted by 27% in the last three months due to its holdings in Tesla, Apple and Alphabet. That said, technology is likely to remain a growth driver in the long term. David Johnson from Kepler comments that the trust “continues to represent one of the most compelling ways to access the technology sector”.
What else should you know about buying trusts?
Here are a couple of additional things to bear in mind when buying trusts:
Trusts have a buy-sell spread. A wide spread can dent your initial returns.
Trusts can be held in stocks and shares ISAs and can be a cheaper option than funds. My ISA is held with Hargreaves Lansdown, which is one of our top-rated ISA providers. The platform fee starts at 0.45% for funds and trusts, but fees for trusts are capped at £45 per year.
The post Looking for ISA bargains? Here are 10 investment trusts currently trading at a discount appeared first on The Motley Fool UK.
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