Page 28 - DIY Investor Magazine | Issue 37

Apr 2023 28 DIY Investor Magazine · The chart below shows how the median discount of share price to net asset value (NAV) across the whole London-listed investment companies market has moved since the start of 2021 – by James Carthew QD VIEW – DISCOUNTS TIME TO GET SERIOUS? What we see is a big lurch downwards around the outbreak of the war in Ukraine. Then a steady widening over the next few months while inflation ballooned and interest rates were climbing, followed by a sharp rally in autumn 2022 as it seemed that US inflation had peaked. More recently, it feels as though discounts are widening again, perhaps as investors fret that higher interest rates might be with us for longer than they had anticipated. ‘THAT IS A SERIOUS PROBLEM FOR THE INVESTMENT COMPANIES SECTOR’ They are probably the funds that were recommended by friends and family, they include some of the funds that have seen the biggest inflows of capital in recent years. That all adds up to a lot of disappointed people. If the sector is to regain investors’ trust, action is needed, and soon. BE WARY OF BIG PREMIUMS However, quite a few of these de-ratings represent a shift from trading at a substantial premium to trading on a modest discount. 3i Infrastructure, for instance, began 2021 trading on a 21% premium and today trades on about a 3% discount. Here the issue is one of education. Big premiums can be problematic. It is wise to be wary of buying funds trading on big premiums to asset value as these can evaporate when sentiment shifts. There isn’t much that 3i Infrastructure can or even should do to get the fund trading back at a 21% premium – unfortunately, that loss may be permanent. ILLIQUIDITY IS AN ISSUE We feel that when a discount starts to hit double digit territory, boards should be thinking about what they can do to tackle that. Most of the funds mentioned above are investing in relatively illiquid assets. It is harder for them to sell investments to fund share buy backs. One fund where that is not true is Scottish Mortgage. There have been some big moves: 59 funds experienced a discount widening of more than 20 percentage points over that period. Within that group are some of the industry’s largest and most visible funds – Scottish Mortgage, 3i Infrastructure, International Public Partnerships, Tritax Big Box REIT, LXI REIT, HarbourVest Private Equity, Pantheon International, Hipgnosis Songs, and Supermarket Income REIT, for example. That is a serious problem for the investment companies sector. These (all of which still have market caps over £1bn) are the funds that many first-time investors will have picked.