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Three investment trusts for contrarians

Rob Morgan
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These three investment trusts may be of interest to value-seeking investors. (Source: Shutterstock)

Contrarian investing involves buying into particular areas or individual assets that are considered to be ignored or underappreciated by the wider investment community. By targeting poorly-performing and unfashionable investments buyers hope to pick up a bargain, wait for positive sentiment to return and reap decent returns.

Although it requires patience it can be a lucrative form of investing. The knack is identifying what constitutes a bargain and what is a trap. As famed investor Warren Buffett remarked, “Price is what you pay, value is what you get”.

A sentiment gauge

Investment trusts often offer clues about sentiment and present opportunities for value-seeking, contrarian investors. Unlike unit trusts and OEICs, investment trusts are “closed ended”, which means there are a certain number of shares in them. Therefore the price is dictated by supply and demand rather than a calculation of the underlying asset values. Over time, prices broadly track movements in the value of the portfolio, but shares can trade at a “premium” or a “discount” to this, which is heavily influenced by investor sentiment. There is a useful article from The Association of Investment Companies (AIC) on how this works here.

This characteristic of investment trusts can be an added risk. For instance, the share price of an investment trust could fall solely due to investors being less willing to pay a premium as opposed to any actual fall in the value of the underlying assets. Conversely, it can signal an opportunity to buy in at an attractive price in the case of a share trading at a large discount relative to its history. The shifting picture of discounts and premiums across various investment trust sectors can also paint an interesting picture of what is popular and what is not – a valuable resource for contrarian investors. Investors should bear in mind, however, that a Trust trading at a discount does not necessarily represent a good investment opportunity. Sometimes there are less obvious underlying reasons why something is trading at a discount that would suggest a more cautious approach.

The following trusts all trade at discounts and they have all, in our view, been subject to weak investor sentiment recently. There is no guarantee this will change, but for the value-conscious contrarian investor they may be of interest.

Each represents a different investment approach and level of risk, and they are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Information Document and Prospectus.

Aberforth Smaller Companies

Investor opinion is generally sceptical towards the UK market. The political uncertainties of Brexit and the weak position of the Conservative government have resulted in outflows from UK equity funds over the past year. Domestically-exposed stocks, typically more prevalent in the small and medium-sized parts of the market, have been particularly affected but could offer opportunities for investors looking to the longer term.

Against this backdrop, we believe Aberforth Smaller Companies Investment Trust is worth a look. Aberforth is a privately owned, “boutique” fund manager, that has specialised in UK smaller company investing for around 25 years. Their particular approach focuses on finding less fashionable businesses at below what they consider to be intrinsic value. This style has been a headwind in recent years with investors prioritising “quality” companies offering highly probable growth in earnings against a backdrop of low returns from other assets such as cash or bonds. Yet we retain confidence in Aberforth’s approach and talented team, and believe the Trust could provide strong returns over the longer term.

The Trust’s shares currently trade at a substantial discount to net asset value of around 10 per cent. There are no guarantees that an improvement in sentiment towards UK smaller companies or greater enthusiasm for value-orientated managers, and for UK smaller companies in general, will reverse this, but it is another factor that could work in the favour of investors buying the shares.

The Key Information Document for this Trust can be found here.

BlackRock World Mining

During the last mining boom, many resources companies were accused of making over-priced acquisitions that were seemingly about empire-building rather than any sensible growth strategy. While a new wave of company management promises prudence and increased focus on shareholder returns, many investors remain unconvinced. Although decent economic growth and a dearth of new competition has seen share prices recover, valuations lag other sectors.

BlackRock World Mining provides a further illustration of this. Even though it’s one of the more popular and highly-regarded investment trusts specialising in this higher risk niche, the trust’s discount has remained stubbornly close to double digits. Presently it is around 9 per cent, and this could represent an additional opportunity if it turns out market expectations for mining firms are too conservative; although the discount could also widen if investor sentiment deteriorates.

There are several reasons for confidence. Major miners are looking to pay out a significant portion of earnings as dividends to shareholders, and this flow of income could underpin share prices. The yield on the Trust is 4.2 per cent (Source: AIC; yields are variable and not guaranteed), indicative of the healthy level available across the sector. What’s more there are some interesting growth opportunities arising.

For instance, The trust now has around 5 per cent of the portfolio invested in lithium and cobalt miners, which should be beneficiaries of increased demand for components for batteries in electric vehicles. These also use up to four times as much copper as conventional vehicles, not to mention the extra needed in the infrastructure involved in distribution and recharging, so this metal could also see increasing demand and higher prices. The trust has 21 per cent exposure to copper-related investments.

The Key Information Document for this Trust can be found here.

International Public Partnerships

The main attraction of infrastructure assets is their ability to generate an income from secure, long-term government-backed revenues. Importantly, this income is often linked to the rate of inflation, and the asset class can offer investors diversification away from equities and bonds.

International Public Partnerships is among the UK’s leading infrastructure investment trusts, valued in excess of £2bn and a constituent of the FTSE 250. It is run by Amber Infrastructure Group and invests in public infrastructure projects internationally, but with a focus on UK assets. The Trust seeks to deliver sustainable long-term returns through growing dividends and the potential for capital appreciation.

Like other investment trusts operating in the sector, shares have seen a rather dramatic change in investor sentiment. Despite the net asset value of the Trust remaining stable shares have fallen, and they now trade at a discount of 3 per cent having been at a premium as high as 17 per cent during 2017. Sentiment towards the Trust by this gauge is at its lowest since the global financial crisis.

One issue has been volatility in the bond market. With bond yields rising (and prices falling) the prices of other income-bearing assets have been under pressure. The demise of Carillion, a major contractor to the sector, was also slightly disruptive to a small number of projects. However, the major issue is political. Intensifying debate about the merits of private capital in financing public infrastructure, most notably UK Private Finance Initiative (PFI) projects, coupled with the possibility of legislative changes occurring under any future Labour-led government, has led to considerable uncertainty and waning investor confidence.

While the backdrop could grow more challenging, it is worth noting the diversification of the portfolio and relatively modest exposure to traditional UK PFI assets (7 per cent). While the Trust operates in various highly regulated areas, and political risk is hard to judge across each of these, the managers of the Trust acknowledge a continued responsibility to demonstrate the value for money it delivers in the provision of key infrastructure and believe there are substantial protections to shareholder value. A yield of 5.1 per cent (Source: AIC; yields are variable and not guaranteed) that could grow over time, as well as the prospect for growth from assets that are currently being developed, could tempt investors prepared to bear the risks.

The Key Information Document for this Trust can be found here.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice. The value of investments and the income from them can go down as well as up and there is a risk to the capital invested. Funds invested mainly a single geography or sector can be more volatile than broader funds, and there could be additional risks. For further explanation on the risks associated with an investment in any of these funds, please refer to the section entitled ‘Risk Factors’ in the prospectus.

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