The Lemon Fool

I have not seen much discussion on IT discounts, but if I look at my IT and investment company portfolio, every one is at a discount (between 2% and 35%). I am not sure I have ever seen this before.

The renewable energy and infrastructure companies (UKW, NESF, HICL) have the largest discounts (>15%) but even some of the boring ordinary UK centric ones have discounts >10% (DIG, AEI).

Some are even starting share buybacks because they consider themselves so under-valued.

Private Equity are also circling some IT's, presumably because they see these large discounts.

What is going on?

Is it just the general under-valuation of the UK stock market compared to overseas markets?

Is it a sign of unpopularity of IT's, perhaps driven by the IFA industry?

Has the IT model, which is fairly unique to the UK, had it's time?

I would have thought it was an excellent time to buy IT's, but maybe I am missing something.

FD

'Money Makers' website has a 2 year graph showing the average discount (if you scroll down far enough on the front page) which confirms your observations.
It is rare for a podcast from the same source not to mention discounts and as such is a very good place to investigate the causes.

I also hope it is a good time to buy because I have an ongoing accumulation ticking away in the space and a lump of cash to deploy sooner rather than later.

W.

Some of the discounts are related to a concern that the assets are overvalued or difficult to value meaning that the NAV may be unrealistic.

everhopeful wrote:Some of the discounts are related to a concern that the assets are overvalued or difficult to value meaning that the NAV may be unrealistic.

This probably will not apply to some of the big old warhorses, though. It does seem a good time to poke around and pick up some bargains - even SSON, if one has the courage.

I've often looked back at a period like this and thought "if only I'd had the courage" - then when such a period occurs, most of us find reasons to doubt our luck.

Arb.

It all revolves ones views on are many assets overvalued including money, and if so, what does one do?

G3lc wrote:It all revolves ones views on are many assets overvalued including money, and if so, what does one do?

Can I ignore that? No, it's just such an open gate. I keep as little "money", well fiat currency, as possible and have taken to saving bitcoin instead of pounds.
For anything to be "overvalued", you need to consider "in relation to what"? Pounds, dollars or bitcoin can only be "overvalued" if their worth is less than their price in XYZ.

Back to investment trusts.

Basically the world has changed, and people have changed with it.

Many are now seeking interest from saving pounds, rather than yield from equities. TINA is no longer quite the thing.

Of course if you have spare cash you can take advantage of the discounts.
I bought a small amount of Seraphim Space Investment Trust a year ago. Since then the discount has narrowed giving me almost a 60% capital uplift.
The prospects for their investments have not really changed in that time.
I also bought Pershing Square Holdings back in January. I'm looking at a gain of 13% on that one over a few months.

Sadly others still languish.

I too am a fan of the MoneyMakers podcast and would add "The Investment Trust handbook" as a "must read".

The nonsense disclosures in KIIDs which aggregate interest on borrowings with expenses of mamanagement may be having an effect. Or at least that's a claim being made in the Daily Mail. Concensus on this site at least would likely be that the KIID headline figures are best ignored both when comparing across ITs and when comparing ITs to other similiar investments.

https://www.thisismoney.co.uk/money/mar ... shell.html

funduffer wrote:Is it just the general under-valuation of the UK stock market compared to overseas markets?

Is it a sign of unpopularity of IT's, perhaps driven by the IFA industry?

Has the IT model, which is fairly unique to the UK, had it's time?

I would have thought it was an excellent time to buy IT's, but maybe I am missing something.

In the past big discounts have been associated with poor conditions in the markets generally. So we saw discounts during the dotcom bust and the global mortgage crisis, but the markets came back and the discounts lowered again.

But now we have booming markets, at least overseas. And yet the discounts are sticky. I suspect that a part of it is that ITs are past their prime. ETFs are now a $3 trillion market. Compared to that ITs are a localised backwater. And it is hard to launch new ITs because of the discounts. And older ones get wound up or merged.

I no longer use generalist ITs. Global ETFs can do that job. But I think specialist ITs can still have their place. 20/25 years ago I was probably 80% in ITs. Now it is less than 20%, and declining.

Wuffle wrote:'Money Makers' website has a 2 year graph showing the average discount (if you scroll down far enough on the front page) which confirms your observations.

Taking that image from https://money-makers.co/ and also taking the same period 10 Year Gilt Yield chart from https://www.marketwatch.com/investing/b ... e_advanced then inverting and scaling it and overlaying it on the Money Makers chart we get the following:

The green line is the ITs discount, the blue line is the inverted 10 Year Gilt Yield, which goes from 1.15% at the left to 4.2% at the right, peaking at 4.7% in Aug-23.

Alaric wrote:The nonsense disclosures in KIIDs which aggregate interest on borrowings with expenses of mamanagement may be having an effect. Or at least that's a claim being made in the Daily Mail. Concensus on this site at least would likely be that the KIID headline figures are best ignored both when comparing across ITs and when comparing ITs to other similiar investments.

https://www.thisismoney.co.uk/money/mar ... shell.html

Yes, KIIDs have provided advisers with another weapon to use to deter clients from investing in investment trusts. The treatment of interest on borrowings when it comes to KIIDs is bizarre. I suspect that there was a bit of lobbying by some firms which didn't want clients to go into investment trusts.

Before KIIDs, discounts were the main line of attack against investment trusts. When I was working I would often come across a case where someone had been advised to invest in a unit trust because you would get market price when you sold, unlike an investment trust (of course in many of these cases the client had then been shoved into an investment bond with a fund which mirrored the unit trust but which paid 5% commission rather than the standard 3% on unit trusts). They couldn't use annual management fees to justify unit trusts because they were generally higher, but KIIDs have made investment trusts falsely appear more expensive.

The growth in ETFs has taken away a lot of the demand for conventional investment trusts. They are still very useful for illiquid investments (private companies) and markets where there isn't much liquidity (which can wreak havoc with open ended funds).

At the moment Foreign & Colonial is on an 11% discount, with an annual management charge of 0.3%. An 11% discount means that F&C shares pay 12.3% more income than a hypothetical ETF which mirrors F&C's portfolio (IMHO F&C is the Investment Trust version of a global tracker). Sign me up (okay, I already am, it's my 6th largest shareholding and largest investment trust - not switching into an ETF in any event because of the CGT I'd have to pay).

mc2fool wrote:

Wuffle wrote:'Money Makers' website has a 2 year graph showing the average discount (if you scroll down far enough on the front page) which confirms your observations.

Taking that image from https://money-makers.co/ and also taking the same period 10 Year Gilt Yield chart from https://www.marketwatch.com/investing/b ... e_advanced then inverting and scaling it and overlaying it on the Money Makers chart we get the following:

The green line is the ITs discount, the blue line is the inverted 10 Year Gilt Yield, which goes from 1.15% at the left to 4.2% at the right, peaking at 4.7% in Aug-23.

Wow, that is an amazingly good correlation!

I am not sure I fully understand the significance. Is it that gilts now offer such a high yield that the risk associated with holding equities (via IT's) is not worth what it was and hence the discount?

FD

funduffer wrote:Wow, that is an amazingly good correlation!

I am not sure I fully understand the significance. Is it that gilts now offer such a high yield that the risk associated with holding equities (via IT's) is not worth what it was and hence the discount?

It's textbook that when the returns on safer assets increase riskier assets become cheaper. I expect there's a multiplier effect with ITs 'cos they are market assets of (most often) market assets and are also often geared.