An investment trust will typically trade on a premium or a discount. That is, its shares might be priced higher than its net asset value per share (NAV), which is a premium. Or at less than the NAV, for a discount.
Large discounts usually happen when investors think the value of a trust’s assets is likely to fall. But if we disagree, we might be able to pick up cheap investment trust shares by looking for big discounts.
I’ve been searching for just that, using the handy filtering tools on the Association of Investment Companies website. The following five have caught my eye.
Discounts
| Trust | Recent price | 12-month change | Discount |
| UK Commercial Property REIT | 55p | -32% | 31% |
| HydrogenOne Capital Growth | 74p | -26% | 23% |
| Target Healthcare REIT | 80p | -26% | 21% |
| Baillie Gifford US Growth Trust | 165p | -29% | 17% |
| Scottish Mortgage Investment Trust | 769p | -27% | 16% |
I can see why most of these are out of favour. Scottish Mortgage invests in growth stocks, mostly listed on the US Nasdaq index. And a lot of those have been through a tough patch. Tesla, Moderna, Amazon… those three figure among the trust’s top 10 holdings. Do we think Nasdaq stocks are forever in the dumps? I don’t. I think they’ll get back to long-term growth.
Baillie Gifford US Growth is very similar. It invests in the same kind of Nasdaq stocks. And its shares have performed pretty much the same over 12 months.
Bricks and gas
Target Healthcare is an interesting one. It’s a real estate investment trust (REIT), so the property squeeze will have had an effect. But it’s more than just an investment in property values. Target holds a portfolio of freehold and long leasehold care homes, which bring in long-term rentals. I think that focus provides safety.
UK Commercial Property REIT though, is exposed to property and to UK commercial pressures as we head into a recession. There’s a bit of a double whammy there. And it’s led to the hardest share price fall and biggest discount of the five. But is commercial property consigned to lifelong poor performance now? Or might the trust have a profitable long-term future pursuing a combination of growth and income?
I also noticed HydrogenOne Capital Growth, one I’ve never really looked at before. It invests in hydrogen and related assets, as the name suggests. And it’s targeted towards the renewable energy market, and the future of hydrogen for energy storage. I think it’s possibly the riskiest of the five, as it’s in a highly competitive business. And HydrogenOne is only a small trust, with a market-cap of just £95m.
Verdict
Scottish Mortgage is the only one of these I’ve researched in any detail, and I bought some. I expect more volatility from it in the next couple of years. But I’m happy to take the risk for what I see as its long-term potential.
The others all face their own individual risks, and investors should do their own research. But with those enormous discounts, I can’t help wondering how a portfolio of all five might perform over the next 10 years. Pretty well, I suspect.
