Discount doldrums

Poor market sentiment, higher interest and discount rates affecting certain alternative asset classes, and sector-specific issues help to explain why discounts stand at their widest point since 1990 – apart from a brief moment during the financial crash of 2008/09. There seems to be no end to the bad news. The central question is whether such discounts have become endemic. Omens and experience suggest not. If so, quality companies across a range of asset classes look attractive – many of which offer attractive yields.


It has been hard pounding for investors managing investment trust portfolios in recent years. By way of context, over 2021 and 2022, total returns for the FTSE All-Share, MSCI World (£) 13.3% and FTSE Closed-end Investments indices are 18.7%, 13.3% and -5.9% respectively. Discounts have continued to drift. Year-to-date returns are 2.2%, 8.5% and -5.5% respectively. Investors continue to sell and remain nervous. This can become self-fulfilling – as prices weaken, more sellers appear. Sentiment has also been hindered by the poor performance of some high-profile names – especially those pursuing a growth remit, such as Scottish Mortgage Trust (SMT).

Various sector-specific issues are also at play. Discounts have always tended to widen when market sentiment is poor. But perhaps this has a particular bearing given the growing presence of retail investors on share registers at the expense of institutions. This is welcome but some private investors sell when waters are choppy and buy when calm. And despite the evolving shareholder base, the current consolidation within the wealth management sector, such as the merger between Investec and Rathbones, requires ever larger companies in which for them to invest. Smaller companies are increasingly being shunned.

Another factor is cost disclosure. Because of over-zealous interpretation of regulations by the various authorities, companies are having to roll-up their corporate costs (financing, administrative, etc.) with the managers’ charges when declaring a cost figure – even though share prices reflect investors’ assessment of such costs. This double counting does not happen in other countries. Given an incorrect industry emphasis on cost disclosure rather than performance net of fees, companies in general are being increasingly shunned by wealth managers and platforms providers alike.

Straws in the wind

Yet straws in the wind hint of varying tailwinds aligning in sufficient strength to shift sector sentiment. Previous columns have highlighted how erroneous forecasting has contributed to poor market sentiment, with economies not falling into recession and corporate finances remaining in good shape. Markets are sensing we are nearing peak interest rates and are quietly climbing the wall of worry – even if discounts do not yet reflect this gradual shift in sentiment. Meanwhile, many of us are questioning those responsible for the double-counting of cost issue, and omens suggest the penny is finally dropping. Further meetings are due.

The sector itself is taking up the gauntlet. Share buy-backs are on the increase – there has been a c.50% increase compared to the same period last year. Such buy-backs increase demand, show confidence in the portfolio and are accretive to NAV returns. Of course, good performance is usually the best panacea but, such is the malaise, many sound companies have not escaped. Yet the rapid narrowing of discounts after the surge in share buy-backs at the end of the 1990s, following the abolition of ACT, suggests they can help provide a strong tailwind.

Company boards are embracing other remedies. There has been a spate of smaller companies in particular announcing strategic reviews and combinations or mergers to ensure remits are focused on shareholders’ interests and marketability is not an impediment – even though this may result in board members retiring early. This looks set to continue and bodes well despite the prospect of a smaller sector. Tender offers, the introduction of continuation votes and annual redemption options are also on the increase.

The quality of the product is also important. In large part because of their structural advantages, investment trusts possess a strong track record of outperformance over both unit trusts and, most importantly, indices – and asset returns generally have not been too far adrift of markets in recent years. Such considerations can be sidelined. Of course, there will always be risk to investment, and it will remain prudent to retain firepower relative to remit via exposure to other, alternative assets including cash.

However, as oft said, it is usually better to be a little too early than too late – markets and discounts can move rapidly, when sentiment shifts. During the spring, we were a little early in pivoting our portfolios toward equities and away from more defensive assets. Markets have behaved, discounts have not. Yet we retain faith as valuations relative to outlook remain important – sentiment trails the fundamentals. And many good quality companies look appealing as a result.

Attractive examples

Our preference for private equity is well documented. Company discounts of 35-40% for the latter do not heed the lesson of history or recognise the cautious portfolio valuations as seen when investments are realised.

Discounts of 20% and more within the infrastructure and renewable energy sectors are harsh given the market is underestimating the extent to which their revenue correlation to inflation will temper prevailing concerns about high discount rates impacting asset values. Yields of 6.5-7.0% are not uncommon.

Meanwhile, high teen plus discounts within the specialist lending sector assume economic recession and a significant rise in company defaults.

Good things come to those who wait.

AIC Showcase

John Baron will be moderating the ‘Where in the World’ panel session at the Investment Company Showcase on 20 October, which is being hosted by the Association of Investment Companies (AIC). A full programme and list of panellists can be found at: We look forward to seeing some of you there.

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