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UK investment trust and companies discounts tighten as smaller companies trusts re-rate


The median discount to net asset value (NAV) for investment trusts and companies in the UK listed space narrowed over 2015 from 7.5 per cent to 6.6 per cent, according to research from investment trust research company QuotedData.

The median discounts of the differing classes of UK trusts all followed a similar pattern of widening in the run up to May’s general election, reflecting heightened uncertainty. This was followed by a period of narrowing once a Conservative victory had been confirmed, which was generally considered to be the preferred outcome for UK businesses.
The shift was most apparent for UK Smaller companies whose median discount moved from approximately 14 per cent to 5 per cent during the year. This arguably reflects a gradually improving outlook for the UK economy even though this brings the prospect of interest rates rises, already seen in the US, closer. This may be one reason why the median UK income and growth rating deteriorated from a 1 per cent premium to a 2 per cent discount during the year.
Three sectors, European Smaller Companies, Japanese Smaller Companies and UK Smaller Companies are among the top four sectors which re-rated the most in 2015.Looking at the top performing sectors in price terms over 2015, these are in order European Smaller Companies, UK Smaller Companies, Japan, Japan Smaller Companies and Europe.
Despite strong performance, these three smaller companies sectors are still trading on average at a discount. The average of the European Smaller Companies sector is -9.3 per cent, Japanese Smaller Companies is -11.0 per cent and UK Smaller Companies is -8.8 per cent.
On the negative side, the story is almost all about continuing weakness in commodity prices, which has had an adverse effect on economies that are heavily exposed to this area such as Russia and Brazil. The main problem is weak demand in China.
The median UK Property and UK Infrastructure funds have both traded consistently at a premium throughout 2015, with Renewable Infrastructure doing so for most of the year. These premium ratings reflect strong demand from income investors attracted by the strong yields available in these spaces.
UK Property’s premium moved from 3.2 per cent to just over 10 per cent in the first quarter but this has slowly unwound during the remainder of the year so that the sector has finished the year on a mildly wider premium of +3.0 per cent. The swing probably reflects rising property valuations in the early part of the year which took some time to filter through into published net asset values.
UK infrastructure traded within a fairly narrow range albeit with a falling trend. Its premium moved to 12.3 per cent to 9.5 per cent over the year. This may reflect the increasing prospect of interest rate rises.
QuotedData research director James Carthew (pictured), says: “The tightening of the median discount of investment companies over 2015 flags their growing popularity with investors and advisers. In particular, there is clear demand for those paying an attractive, consistent yield.
This is likely to continue to be the case for some time and investors will probably still be drawn to funds investing in areas such as property, infrastructure, online (peer-to-peer) lending and specialist leasing companies, all of which pay a good level of income. The prospect of rising interest rates is playing on some investors’ minds but the weak start to the year has pushed back the timescale for interest rate rises in the UK at least.
The support that central bankers are providing to some economies has helped performance of domestic (primarily smaller) companies in those markets. Over the very short-term, the median discount for European trusts has widened but Draghi’s statements earlier this month could help sentiment recover when markets stabilise.
Shifting ratings can throw up interesting opportunities from time to time but we would stress the importance of investing over the longer-term and focusing on fundamentals, rather than reacting to short-term volatility.”

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