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Investment Trust Watch: Scottish Mortgage and other bargains in nervous markets

Investment Trust Watch: Scottish Mortgage and other bargains in nervous markets

Scottish Mortgage (SMT) is the most eye-catching entrant to our cheap list this week. The £6.6 billion FTSE 100 constituent has made one of its occasional dips into discount territory after its shares closed 0.7% below their net asset value (NAV) yesterday. This contrasts with the average 2.5% premium at which the shares have stood in the past year to give it an inexpensive Z-score of -2.5.

Just to recap, a Z-score is a statistical measure used by analysts to put an investment trust share price in some historical context: ie, to get a quick view on whether its discount (shares trade below net asset value) or premium (shares trade above NAV) is really cheap or expensive? Broadly speaking a Z-score of -2 or below is considered ‘cheap’ (see first table from Numis Securities below while 2 or more is viewed as ‘dear’ (second table).

Strong investor demand for the high-performing shares means SMT rarely stays on a discount for long. It traded 5% below NAV in January 2016 and briefly hit similar discounts to today in July, September and December last year.

The recent choppiness in its rating comes as shareholders debate whether its managers James Anderson and Tom Slater can continue their amazing run amid widespread predictions of an end to the lengthy bull market that has prompted many to sell some shares and bank some profits.

There are plenty of gains to take. Since recovering from a fearsome mauling during the financial crisis a decade ago, SMT has delivered an annual total return of 16%, according to Morningstar, way ahead of the 10% annualised rise in the FTSE World index. Last year the trust’s potent mix of US and Chinese technology platforms and other business challengers, both on and off the stock market, saw it deliver an impressive 41% return (continues below).


'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
City Merchants High Yield (CMHY)  -3.6 1.5 -6.5
Hadrians Wall Secured Investments (HWSL)  -0.6 8.0 -3.8
Carador Income Fund (CIFU)  -15.2 -3.6 -3.4
Masawara (MASA) -62.5 -37.8 -3.2
3i Infrastructure (3IN)  0.1 14.0 -2.9
Schroder European Real Estate (SERE)  -14.2 -5.2 -2.8
NewRiver Retail (NRR)  1.3 15.4 -2.8
Scottish Mortgage (SMT)  -0.7 2.3 -2.5
GCP Infrastructure Investments (GCP)  7.8 15.0 -2.4
Terra Capital (TCA)  -24.6 -17.3 -2.4
Tiso BlackStar Group (TBGR)  -53.6 -34.0 -2.3
Carador Income Fund Redeemable (CIFR) -8.0 -3.4 -2.3
International Public Partnerships (INPP)  4.0 10.0 -2.3
Leaf Clean Energy (LEAF)  -50.5 -40.0 -2.3
MedicX Fund (MXF)  7.5 18.7 -2.1

Source: Numis Securities 1/2/18

Should I sell SMT?

Last month Slater addressed investor concerns head on with a presentation entitled: ‘is it time to sell Scottish Mortgage?’ in which he challenged the notion that SMT was simply a ‘FANG’ (Facebook, Amazon, Netflix and Google/Alphabet) stock fund, while arguing that the tremendous growth prospects of Amazon, Tencent, Tesla and Illumina, the gene sequencer maker, justified their high ratings and the fund's big holdings in their shares.

Slater’s conclusion was clear and unsurprising: don’t sell. However, a separate intervention on the hot topic of 'key information documents'  from John Kay, the economist and author and a non-executive director on SMT’s board, suggested a different, though positive, take: don't put all your money in SMT thinking it will deliver forever.

‘It would be foolishly risky for anyone to entrust the whole of their savings to an investment in this fund,’ Kay said, before going on to add that the focused portfolio built on a conviction of continuing rapid technological change and long-term economic growth was the perfect antidote for anyone whose portfolio was too cautious and risk averse.

Innes Urquhart, an analyst at Winterflood Securities who had heard Slater’s talk, commented: ‘Even for those with different views on these [FANG-type] companies and their current valuations, there is still arguably much to commend Scottish Mortgage.

‘The fund is genuinely very actively managed and its size and very competitive fee structure mean that it is low cost, particularly given its private equity exposure. As such, we continue to recommend the fund within our model portfolio, albeit investors should be cognisant of the potential for bouts of share price volatility and be prepared to take a long‐term view.’

In other words, if you can genuinely part with money that you won’t need for five years or more and won’t freak out if your investment falls in the short term this could be a good opportunity to get involved in what is currently the UK's main standard bearer for active investment.

Other bargains

Hadrians Wall Secured Investment (HWSL), which generates a 6% yield from a £123 million portfolio of loans to small businesses, trades close to par after shedding its premium to leave it in second place in our first table on a Z-score of -3.8.

Carador Income (CIFU), an investor in high risk bundles of loans known as collateralised loan obligations, trades on a 15% discount and offers a 13% yield which suggests investors either don’t believe its quarterly dividends are sustainable or don’t understand how they are generated.

Terra Capital (TCA), an AIM-listed, Isle of Man based activist investor in emerging and frontier markets, may not be what most investors want either as they look to take some chips off the table. Its shares languish on a 24% discount and -2.4 Z-score.

If a portfolio of properties in Europe’s ‘winning cities’ sounds more attractive, then Schroder European Real Estate (SERE) offers an entry point on a 14% discount and -2.8 Z-score.

And while GCP Infrastructure (GCP) does not trade on a discount, its premium is much reduced at nearly 8%, making it comparatively cheap on a -2.4 Z-score. Like rivals 3i Infrastructure (3IN) and International Public Partnerships (INPP), which also appear in our Numis' cheap list, its rating has slipped following the furore over bust contractor Carillion and the ensuing debate over the use of private finance initiatives (PFI) in the public sector. Jefferies tipped GCP this week arguing it had relatively little exposure to PFI projects and its shares had been unfairly punished.


'Expensive trusts' Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
River & Mercantile UK Micro Cap (RMMC)  16.7 0.4 3.6
Jupiter Green (JGC)  -1.6 -5.3 3.2
BlackRock Income & Growth (BRIG)  0.0 -2.6 3.2
JPMorgan Russian (JRS)  -11.5 -15.8 3.1
EJF Investments (EFJI)  6.2 1.7 3.0
JPMorgan Claverhouse (JCH)  -2.0 -7.0 2.9
Pacific Alliance China Land (PACL)  -12.9 -18.4 2.9
Pacific Horizon (PHI)  -4.2 -9.5 2.8
BB Biotech (BION)  6.8 -1.8 2.7
JPMorgan Japanese (JFJ)  -6.5 -11.1 2.7
JPMorgan Chinese (JMC)  -7.4 -12.8 2.7
Alternative Liquidity (ALF)  -42.8 -73.4 2.6
Foreign & Colonial IT (FRCL)  -2.8 -6.3 2.6
Aberdeen Private Equity (APEF)  0.4 -14.2 2.5
Jupiter European Opportunities (JEO)  1.5 -2.9 2.5

Source: Numis Securities 1/2/18

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