Page 45 - DIY Investor Magazine | Issue 36

I think the discounts on technology and biotech/healthcare look the most appealing; I own three trusts in the latter sector and have topped up on all of them this year.
While technology trusts have seen their NAVs hit hard, biotech/ healthcare has held up reasonably well, so the fact that their discounts have widened so much seems a little harsh.
Only four equity sectors have seen discounts narrow this year; unsurprisingly, Commodities is one of those with Country Specialist (essentially just Vietnam trusts), UK Equity Income and Global Equity Income being the others.
The discount damage across alternatives is much heavier, especially in property trusts, growth capital, and private equity:
conditions. I profiled it a few months ago at Money Makers and an edited and updated version of that article should be appearing in The Investment Trusts Handbook 2023.
It’s worth noting that one or two trusts can distort the sector average significantly. Scottish Mortgage dominates the Global sector and 3i does the same in Private Equity. 3i sits on a 10% discount so the sector average of 25% hides the fact that the vast majority of other trusts are on a discount of between 30% and 50%.
Four alternative sectors were trading at a premium at the end
of 2021 but are now at a discount — Infrastructure, Renewable Energy Infrastructure, Property – UK Residential, and Property – UK Logistics, which has recorded the widest move of all, going from a 14% premium to a 33% discount.
Tritax Big Box REIT with nearly £6bn in assets makes up most of this sector but Urban Logistics REIT and Warehouse REIT are no minnows as they both have £1bn of assets.
It may seem odd that Renewable Energy Infrastructure has seen less of a decline than plain vanilla Infrastructure this year. Both are suffering from higher discount rates but the former has also been bashed by the electricity generator levy in the Autumn Statement.
However, energy prices have risen so much, the NAVs of these funds are still quite a bit higher than a year ago.
The 14% premium on Infrastructure as of the end of 2021 looks especially rich with hindsight and probably would have come down in a normal market year anyway.
There is a time lag with many of the NAV figures in Alternatives with figures generally produced quarterly or semi-annual basis, so in many cases, discounts will narrow automatically once more up-to-date figures are produced incorporating the latest changes in interest rates, discount rates, etc.
A large discount is worth investigating but shouldn’t be the sole or even main reason for buying, in my opinion, as the devil can be lurking in the detail.
45
Dec 2022
DIY Investor Magazine ·
ALTERNATIVES
Discount
Discount on Sector on
18 Nov 22
31 Dec 21 (%) (%)
Change since 31 Dec 21 (% pts)
5.5
-8.0
-16.6
-1.1
0.2
-10.7
-8.9
-11.2
-3.3
-6.0
-47.0
-35.8
-13.5
-42.2
-39.9
Hedge Funds
Renewable Energy Infrastructure
3.8 -1.8
-1.5 6.5
Infrastructure -2.3
14.3
-4.2
-10.7
-3.6
-7.2
- 6 .1
-16.2
-24.2
14.3
0.4
-22.7
-0.6
-3.6
Debt – Loans & Bonds
Debt – Structured Finance
All sectors
Property – Debt
Debt – Direct Lending
Flexible Investment
Leasing
Property – UK Logistics
Property – UK Residential
Insurance & Reinsurance Strategies
Property – Europe
Growth Capital
-5.3
-10.5
-14.3
-16.1
-17.4
-19.5
-30.2
-32.7
-35.4
-36.2
-42.8
-43.4
Source: www.theaic.co.uk / Morningstar. Weighted averages for AIC sectors with at least three constituent companies.
There is only one sector with a premium rating, and that is Hedge Funds; this is due to the popularity of BH Macro, which has an impressive record of thriving in volatile market