9 November 2022
Property investment trusts dominate the sectors trading at a discount to the value of their underlying assets, according to RBC Brewin Dolphin analysis of Association of Investment Companies (AIC) data.
The wealth manager found that six of the 10 sectors with the widest discounts fall under the property, ranging from UK residential to overseas commercial property, with a combined unweighted average discount of -38%. The current average discount on investment trusts is -15%.
Private equity investment trusts are also trading at a relatively large discount, with an unweighted average of -32%, while growth-focussed trusts have fared even worse with an average discount of -42%.
Many investment trusts have seen discounts against their net asset value (NAV) – the value of their holdings after liabilities – stretch to historic highs, offering investors the opportunity to buy shares at an optically competitive price.
Investment trusts are closed-end funds with a fixed number of shares and are listed on stock exchanges – the shares trade on a premium or discount to NAV, influenced by changes to the value of and sentiment towards their underlying assets, which can make them more volatile. There are 414 listed investment companies, or trusts, registered with the AIC.
By comparison, open ended funds create new or retire existing shares according to demand and sell them directly to investors. If a large number of shares are redeemed, the fund may be forced to divest some of its assets to pay back its investors.
Rob Burgeman, senior investment manager at RBC Brewin Dolphin, said: “Investment trust discounts have ballooned to historically wide levels, driven in large part by a fall in retail demand. However, investment trusts can have distinct advantages over open ended unit trusts, especially in certain sectors where the underlying assets are, themselves, illiquid – property being a prime example.
“In the wake of the pension fund liquidity crisis, many pension funds have been desperately looking to liquidate their investments in UK commercial property, causing open ended funds to freeze dealing. While closed ended funds have also seen a widespread and indiscriminate sell-off too, the key difference is they won’t be forced to dispose of assets. In fact, because they can borrow, they could even turn someone else’s misfortune into their opportunity.
“Abrdn European Logistics Income plays into a number of interesting themes and offers a 6.17% dividend yield, with much of its rental income inflation-hedged. BMO Real Estate stands at a -46% discount to its underlying NAV and offers an ongoing yield of around 6.15%. The fund offers a mixed portfolio of UK property assets, with exposure to industrial, retail and office space, with more than 50% of the portfolio in London and the South East.
“The Abrdn UK Property Income Trust has a similar spread, with slightly less emphasis on retail space and a slightly greater exposure to industrial property. The shares stand at a -51.4% discount to NAV and offer a yield of 7.36%. Finally, Target Healthcare REIT is one of the leading investors in modern care homes and stands at a -29.7% discount to NAV, with a yield of around 8.5%.
“But, not all that glitters is gold and some sectors are facing structural challenges and a difficult time ahead with the cost of financing themselves. Private equity funds may stand at substantial discounts, but there remain doubts over how the published NAV figures will hold up in the wake of equity market falls and rising interest rates.”
10 investment trust sectors with widest discounts:
Sector | ||
Source: AIC
10 investment trust sectors with lowest discount/highest premiums:
Sector | ||
Source: AIC
Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444).
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PRESS INFORMATION
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NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.7* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 30th June 2022.