So far 2025 is shaping up to be an unpredictable and difficult year for investors, but for one part of the financial markets there has been some positivity.
Last October, investment trusts were languishing at an average discount to NAV (net asset value) of 17%, the largest since the financial crisis, according to data from industry body the Association of Investment Companies (AIC).
Valuations had been brought low by higher-for-longer interest rates, which undermined the relative attractions of what for many years has been a reliable source of income.
By early March, the average discount had closed to 11%, helped in part by lower rates but also by M&A activity and, arguably, by the attentions of activist US hedge fund Saba.
DOUBLE-DIGIT DISCOUNTS CAN PRESSAGE DOUBLE-DIGIT RETURNS
Analysis by the AIC going back to 2008 shows investment trusts with average discounts above 10% returned 89.3% over the next five years while trusts with average discounts under 5% returned 56.1%.
Annually, wide discounts produced returns of 13.6% compared to 9.3% for narrow discounts — a difference of more than four percentage points. This analysis covers 128 five-year periods from June 2008 to January 2024.
Even though it failed in its attempt to secure control of several trusts trading at a discount to NAV, its campaign was successful in shaking up the trust universe and encouraging engagement with shareholders as well as spurring actions to address persistent discounts.
We decided it would be worthwhile to look at the trusts which have performed best so far this year to see what trends can be identified and understand what has helped drive them higher.
Top of the list is JPMorgan Emerging Europe, Middle East & Africa Securities (JEMA), but this is an outlier – it’s shares are trading at a huge premium to net asset value on the basis its Russian holdings, whose value has been written down, might be worth something after all based on hopes for a peace deal in Ukraine and an apparent thawing in US-Russian relations.
Other top performers, including logistics investor Warehouse REIT (WHR), infrastructure play BBGI Infrastructure (BBGI), Ground Rents Income Fund (GRIO) and care home owner Care REIT (CRT) have been the subject of consummated and unconsummated bid interest.
As well as being pulled higher in Warehouse REIT’s slipstream, fellow retail landlords Urban Logistics (SHED) and Supermarket Income REIT (SUPR) have announced plans to bring their management teams in-house, potentially saving on costs.
Deutsche Numis analyst Colette Ord comments: ‘The externally-managed REIT model has been coming under increased pressure over recent months in the face of widespread discounts driven by structural and technical headwinds, including cost disclosure, competition for capital and potential for misalignment of incentives from management fees.’
The other big themes which stand out are the recovery in trusts which are exposed to the Chinese and European markets as both geographies have seen a revival in terms of investor sentiment since the start of the year.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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