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The market value is the price an investor is willing to pay for a company’s stock and it is rarely the same as its underlying book cost. It could be greater or lesser for any number of reasons and this variance provides the well-informed investor with opportunities. This is particularly pertinent within the investment trust world, investment companies traded on a stock exchange.

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The average share price to the underlying Net Asset Value (NAV) within the Investment Trust sector is -14.7% and nearly as wide as it was following the 2008 financial crisis when it dropped to -17.7%. However, this “average” is misleading and is distorted by investment firms that specialise in areas of alternative energy and infrastructure where discounts are in the region of -25 to -35%.  Elsewhere, generalist trusts such as the global equity income and UK equity income companies we at EXE Capital Management favour have almost closed their discount entirely with Law Debenture now trading at a premium. Even our chosen global growth and smaller company trusts are only at a discount of between 9 -10% on average.*

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One reason that Alternatives are at such a wide discount is because of the rise in interest rates from the end of 2022. Many of these alternative trusts were launched when interest rates were close to zero and their offer of a 5% dividend was, by comparison, very appealing. When interest rates rose to match the dividend on offer it caused the trusts, being riskier than cash, to fall in value which in turn lifted their dividend to new investors to nearer 8 or 9%. This fall in value is why the shares are trading to much less than their underlying asset value.

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One sticky issue is that there are more of these trusts around than there need to be and so we are seeing a new trend of activist managers taking larger stakes in these companies to attempt to persuade the boards to align their interest with that of their shareholders. This can take the form of share buy-backs that reduce the number of shares in circulation which in turn lifts the share price, or to wind up the companies to distribute the higher NAV back to shareholders or to merge with one another.  

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The latest example of this was the recent announcement that Downing Renewables & Infrastructure Trust (DORE) has received an offer to acquire it from Bagnall Energy Ltd which represents a premium on DORE’s current share price of 23.6%. Downing’s portfolio is mainly UK based solar with subsidies and hydro in the Nordics which are exactly the type of assets that Bagnall wants to own and are complementary to its existing portfolio.

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Comments from James Scott-Hopkins, Founder, EXE Capital Management.

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The views are those of the author only. The above does not constitute a recommendation to buy specific funds or Investment Trusts and advice should be sought from your financial advisor as to the appropriateness of this in your portfolio. The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

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