Three trusts that have slumped to big discounts and now look too cheap

Unrelenting bad news is depressing sentiment across the financial markets, throwing up some surprise bargains in the process

This column’s job is to look for bargains among London’s listed funds and the current sense of all-embracing crisis is throwing up plenty of them. Today we revisit three investment trusts tipped here in the past whose share prices have fallen and whose discounts have widened into distinctly bargain-like territory. The first is Phoenix Spree Deutschland, which owns residential property in Berlin.

Its earlier troubles, widely reported in this column, over a proposed rent cap are now behind it (a court ruled the cap unconstitutional in April last year) but the shares have still fallen by 24pc since a peak 13 months ago. If we use an estimate of the fund’s net asset value of €5.75-€5.80 (498p-502p) calculated by Liberum, the broker, and yesterday’s exchange rate, the discount is about 39pc. Should the dividend be maintained at 7.5 euro cents a share, the yield will be 2.1pc at the current exchange rate and share price.

It’s not hard to imagine why the share price may have fallen so far.

We are surrounded by bad news as winter approaches and Germany in particular faces shortages of energy as well as a cost-of-living crisis similar to our own. A mental image of cash-strapped Berliners shivering in their flats this winter is unlikely to prompt many to invest in the trust that owns those flats.

Questor’s view however is that those residents, like their counterparts in any country, will make paying for the roof over their head their first priority. Even if Berlin’s property market stagnates in such an unpromising economic environment, the portfolio looks conservatively valued: properties sold by the trust in the first half of the year fetched prices at a 20pc premium to book value. This trust looks too cheap. Buy. Next up is another property trust, Tritax Big Box Reit, which owns large warehouses leased to the likes of Amazon, although in Britain this time.

The shares were as high as 246p in April, when the premium to net asset value reached 13pc relative to the NAV at the end of December of 218.26p. But the shares fell sharply after Amazon, which accounts for about 15pc of the fund’s rental income, said it was likely to slow the rate at which it opened new warehouses, an announcement that knocked confidence in the sector. The share price is now 164p, a discount of 31pc to the 239.23p NAV as at the end of June.

The fall in the shares has pushed the yield up to 4.1pc. While the trust’s index-linked rental contracts are subject to caps at a typical level of 3.4pc, it increasingly seeks to use “hybrid” contracts that see rents rise by the higher of inflation or the open market rent. And the assets it specialises in remain in short supply, partly thanks to the difficulty in gaining planning permission for such large buildings. The violent change from a double-digit premium to a steep discount despite a rise in the value of the portfolio itself does illustrate the dangers of buying investment trusts at a premium. But in Questor’s view the market has overreacted. Buy.

Finally we’ll take another look at Hipgnosis Songs Fund, which receives royalties on the rights it owns on some of the world’s most enduringly popular music; it is reportedly in line to acquire a share in the rights to Pink Floyd’s songs and master recordings.

Its shares too have fallen steeply, from a record high of 126.24p in November last year to 109.8p last night. JP Morgan Cazenove, the broker, estimates Hipgnosis’s NAV at $1.83 a share, or 159p at the current exchange rate. This would make the discount 31pc.

The broker described such a discount as “one of the biggest, and most puzzling, anomalies in the entire investment companies sector”. It added: “We remain overweight [a buy recommendation], with Hipgnosis being one of our very best ideas.” Buy.

Questor says: buy

Tickers: PSDL, BBOX, SONG

Share prices at close: 306p, 164p, 109.8p

Investment trust news

Harry Nimmo, manager of the Abrdn UK Smaller Companies trust, is to retire at the end of 2022 after more than 37 years at Abrdn and its predecessor, Standard Life.