Looking for bargains to build up a nest-egg? Here’s a golden dozen

DISCOUNTS are an integral part of our shopping experience. Whether it’s a five per cent discount off our next purchase made via online marketplace eBay or a ten per cent reduction on our next Amazon order, we welcome them with open arms. It explains partly the success of Santander’s 123 current account that is built on luring in customers with discounts on household bills, provided they are paid via the account.

Discounts are also a feature of the investment world. Buy an investment fund via an online wealth manager such as Hargreaves Lansdown and in return for your custom, the annual charge applied to the fund will be discounted.

So, for example, purchase a holding in popular fund Guinness Global Equity Income via Hargreaves and the annual charge will be 0.78 per cent – not 1.98 per cent if bought directly. Such discounts are one of the main reasons why online fund platforms have become so popular. It no longer makes financial sense to buy an investment fund any other way.

Yet discounts take on a different meaning when we talk about stock market-listed investment trusts. Yes, the word still implies bargains are to be had, but they are not offered by the managers of the trust or the fund platform through which you manage your investment portfolio. They are a function of the stock market and the simple laws of supply and demand.

In basic terms, when an individual investment trust’s shares are proving popular with investors, it can result in them trading above the value of the trust’s underlying assets. A function of buyer-demand driving up the share price. When this happens, the shares are said to trade at a premium to asset value.

Yet when an investment trust’s shares are unpopular, the opposite happens. A lack of demand means shares can end up not reflecting the value of the trust’s assets. In other words, they trade at a discount.

Discounts in the investment trust world result from a number of factors – a particular investment theme falling out of favour; an investment trust manager delivering poor performance numbers relative to the opposition; or, as has happened recently, the stock market going into meltdown.

In the wake of the coronavirus pandemic, the discount on the average investment trust widened to 25 per cent – larger than the 18 per cent in the 2008 financial crisis.

Although the average discount has since fallen to 11 per cent, Annabel Brodie-Smith, communications director of the Association of Investment Companies, believes there still are a number of heavily discounted trusts that provide brave investors with the chance to generate stellar returns.

She says: ‘Markets have partly recovered since the initial brutal sell-off last month but there’s still a variety of investment trusts which are trading at double-digit discounts. These offer opportunities for investors with a longer time horizon who are willing to do their homework.

‘Of course, no one knows what markets will do next and it’s impossible to know what the long-term impact of coronavirus will be.

‘But if you had invested at the peak of the market in 2007, just before the financial crisis, an investment in the average investment trust would still have more than doubled, with a return of 123 per cent. Although market volatility is nerve-racking for everyone, it’s comforting to look back in history where long-term investing has really paid off.’

In the table above are 12 investment trusts whose shares last week were trading at discounts to asset value in excess of 10 per cent – and at bigger discounts than those at the end of last year. They are all trusts run by respectable investment houses such as Aberdeen Standard, Franklin Templeton, Janus Henderson (TR European Growth and Henderson Opportunities) and Schroders.

In terms of investment mandates, they range from global, emerging markets, private equity through to the UK stock market.

Some of these investment themes – such as emerging markets – are particularly out of favour, which in part explains the double-digit discount.

Some of the 12 have recorded sharp share price falls over the past month (JPMorgan Indian, down 16 per cent), while others have been far more resilient (Schroder Japan Growth, up nearly 17 per cent, Scottish up 19 per cent). Longer term, eight have generated positive returns over the past five years.

So, why should you consider buying any of these 12 trusts above others? It’s because the doubledigit discount gives the opportunity (not the guarantee) to add a performance top-up – if it reduces in time as stock markets improve.

For example, shares in Templeton Emerging Markets can be bought for £6.81 and trade at a discount of 12 per cent. This buys you exposure to assets per share of £7.74.

If we assume the trust’s assets grow in value by 23 per cent over the next five years (the same as they have done in the past five), and the share price discount reduces to five per cent, the share price will be £9.04. In other words, an ‘enhanced’ gain of 33 per cent.

The larger the discount reduction, the bigger the ‘enhancement’ although of course the mathematics can work against investors if the discount widens further.

Some argue that the discount is an irrelevance. It’s long-term investment performance that is allimportant. They have a point, but for alert investors it can add a bit of investment spice at a time when spice is in short supply.

As Moira O’Neill, of wealth manager Interactive Investor, says: ‘Discount opportunists have to move fast. Snooze and you lose.’

For example, she cites global trust Murray International whose shares last month could be bought at a double-digit discount, but which now trade at close to asset value.

For those prepared to watch the investment trust sector like a hawk, a double-digit discount could bag an investment bargain.