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Equity trusts offer value as renewables and infrastructure premiums climb

Biotech trusts top performance charts in February

Equity trusts offer value as renewables and infrastructure premiums climb

By David Brenchley

Investment company discounts moving into 2020 have “never been tighter”, but trust buyers are still seeing bargain opportunities in a number of equity-oriented mandates…

Through 2019, the renewables sector re-rated from a 4% premium at the beginning of the year to a 21% three-year high by year-end, broker Stifel pointed out in a recent note to clients. Likewise, the infrastructure sector moved from an 8% premium at the beginning of 2019 to a 15% premium by year-end.

However, there are pockets of opportunity for investors to pick up a bargain in the ‘new year sale’, particularly in those areas that performed poorly last year.

For instance, the worst-performing trust in 2019 was Riverstone Energy, which invests mainly in unlisted North American oil firms. Riverstone lost almost two-thirds, or 61.5%, of its value last year, leading to its discount widening to 57.8% as at 7 January – twice as wide as its three-year average discount of 24.6%.

While James Carthew, head of investment company research at QuotedData, noted the stock “is not without risk”, he countered that “if the recovery in the oil price is sustained, things might improve for Riverstone Energy”.

Elsewhere, India Capital Growth also performed poorly, shedding 39% of its value in the past two years. As a result, its discount is almost 20%, having traded on a single-digit figure of 8% in the summer.

Carthew explained India’s stockmarket is “a long way off its highs”, while the “small- and medium-sized companies this trust specialises in have underperformed”. As a result, the trust’s manager believes “this is the best buying opportunity since 2013”…

UK small- and mid-cap companies received a bounce from December’s General Election win for Boris Johnson’s Conservative party, leading many trusts to see a sharp re-rating during November and December.

However, one that remains on an attractive discount according to Carthew is Strategic Equity Capital, which trades on a 16.7% discount, compared to a three year average 14.5%.

The trust has had a difficult few years, said Carthew, but 2019 was better, with returns of 26%, well ahead of its benchmark.

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