Page 18 - DIY Investor Magazine | Issue 39

WE’RE GOING TO NEED A BIGGER BOAT...
Nov 2023 18
DIY Investor Magazine ·
We argue that corporate activity is picking up, making the investment trust sector an exciting place to invest...by Thomas McMahon
It’s an exciting time for investors in the investment trust sector, even if it might not feel like that right now. The chart below is striking, and if you listen carefully you can hear the sucking sound as billions of pounds disappear off the LSE. It is the average discount in the IT sector (ex VCTs, ex 3i). What it shows is a stampede for the exits, as investors finally capitulate in 2023 after a couple of difficult years.
The average discount in 2021 was 3.1%, and this widened
to 8.8% in 2022. Over 2023 it has been 14.9% for the year to date, reaching 17.6% at the time of writing. The sector is almost as out of favour as it was in March 2020 when the nation was wondering whether it would have to use stadia as temporary morgues and Matt Hancock was planning his TV career.
The last few weeks seem to have seen the mood shift in the sector—although, of course, what we are hearing is the fruits of earlier discussions and decisions.
A growing number of boards are outlining concrete steps
to address the discount of their share price to NAV. We are strong believers that there is good potential in the NAVs of most sectors right now after significant sell-offs in public markets have left assets looking cheap, while technical reasons—i.e. a dash for cash—have left trusts holding high-quality real assets, in many cases with inflation-linkage, trading at wide discounts.
‘WE ARE STRONG BELIEVERS THAT THERE IS GOOD POTENTIAL IN THE NAVS OF MOST SECTORS RIGHT NOW’
In that light, we note JPMorgan published their Long-Term Capital Market Assumptions last week, in which they forecast returns for various asset classes over the next decade.
The sell-off in real estate and other real assets, where the investment trust sector is strong, has led to a significant mark- up in expected long-term returns.
Similarly, equity markets are undoubtedly more attractive than they were 18 months ago after such a significant sell-off—if one has a sufficiently long-term investment horizon. However, we think it is fair to observe that few people are interested in those long-term potential returns right now.
With cash or cash-like investments offering 5% plus, investors are shifting their portfolios there and using liquid investments like investment trusts as sources of capital.
Understandably, managers and boards may find this frustrating, and seek to focus on the long-term potential of the NAV for as long as possible, but ultimately they serve shareholders and so they must react to shareholders’ shorter-term focus.
As a result, we have seen corporate activity pick up in recent months, and we expect this to accelerate. This creates opportunities for investors in the sector, both individuals and those with fund-picking mandates. One potential straw in the wind is the decision by the board of private equity investor Symphony to realise assets and wind up the company.