An investment trust discount arises when a trust’s share price is lower than its net asset value (NAV). The NAV is the value of the trust’s assets minus any liabilities, which can be divided by the number of shares in issue to get a per share number.
For example, an investment trust with 100p of assets per share and a 95p share price trades at a 5% discount to NAV. And a trust with 100p of assets and a 50p share price trades at a 50% discount.
Performance double-whammy
Wide discounts can provide bargain-hunters with the opportunity to buy assets for less than they are worth, at least in theory. They can profit from a performance ‘double-whammy’. This happens when strong underlying asset growth combines with a narrowing of the discount.
This causes the share price to outperform the actual portfolio growth, supercharging the investor’s returns. However, you must be prepared to do some digging to understand why a discount exists.
Bargain or value trap?
Discounts usually reflect a mixture of factors and there may be no simple fix or catalyst to bring the discount in. Subdued demand for a trust’s shares could be attributable to poor performance or an investment style that has fallen out of favour.
Trusts that have low profiles can fly under the radar of investors, leaving them languishing on excessive discounts.
Changes in the supply of a trust’s shares can also have a big influence. This can happen through share buybacks or share issuance. Buybacks reduce supply, which can reduce a discount or stop it widening further. Share issuance has the opposite effect and is normally done when trusts trade at premiums to NAV.
Identifying a catalyst – such as activist investor pressure, continuation votes, corporate mergers, or interest rate cuts – is essential to turn a cheap discount into a profitable recovery rather than a permanent value trap.
Why discounts have narrowed
After several challenging years for the investment trust sector, discounts have begun to narrow with the help of lower interest rate expectations, share buybacks, M&A activity and activist pressure.
According to the Association of Investment Companies (AIC), the average UK investment trust now trades on a 10.7% discount to NAV at the time of writing. Yet many trusts are still trading on discounts exceeding 20%, and a number even trade at cavernous discounts north of 50%, offering potentially attractive opportunities for investors if sentiment improves.
Many trusts on wide discounts have strong long-term track records but are either perennially unloved or have temporarily fallen out of favour with investors.
In this article, we shine the spotlight on a trio of trusts trading at wide NAV discounts despite having strong long-term performance track records. We explain why they trade at these levels and identify some catalysts that could help their discounts narrow.
Hansa Investment Company (LON:HAN)
Hansa’s (LON:HAN) NAV discount – 37.9% on the ordinary shares and 39.7% on the non-voting ‘A’ shares – is among the widest in the investment trust sector. And Kepler’s Ryan Lightfoot-Aminoff points out that on a technical level, Hansa’s elevated cash levels make the effective discount even wider.
Sharesify thinks this reflects an outdated view of this storied trust and its previous complexity, while some investors may not like the dual share structure. This excessive discount overlooks the positive transformation that Hansa has undergone following a combination with Ocean Wilsons Holdings, which has resulted in lower fees, as well as its positive long-term performance track record. The trust has generated three and five-year annualised total returns of 22.8% and 10.2% respectively.
Simplified proposition
The combination with Ocean Wilsons created a diversified trust with a simpler multi-asset portfolio. Manager Alec Letchfield seeks to generate long-term capital growth a portfolio spread through four sleeves: country and thematic funds, direct global equities, private assets and diversifying assets.
| AIC Sector: Flexible Investment | Share price (ords): 342p |
| Discount to NAV: -37.9% | 1-yr average discount: -40.1% |
| 3-yr average discount: -40.5% | 5-yr average discount: -39.7% |
Source: The AIC/Morningstar
Letchfield has constructed a portfolio with a preference for specialist and unique active managers that are unavailable to most investors, alongside lower cost, broad market exposure. These are blended with a direct equities sleeve, private asset funds and more all-weather, diversifying funds.
Hansa needs to keep on delivering strong investment performance to narrow the discount, while ongoing share buybacks should also help. Another potential catalyst for a rerating is the fund’s recent promotion to the FTSE 250 Index. Historically, this has shown to be a positive contributor to liquidity since it attracts passive money.
As investors become more appreciative of the trust’s strengths, they may also learn to appreciate the benefits of investing alongside the Salomon family. As Letchfield tells Sharesify: ‘We do have this large family ownership. However, having that family protection to prevent short-term people like Saba coming in to make a quick buck makes a lot of sense.’
Pershing Square Holdings (LON:PSH)
Since listing in London in 2017, Bill Ackman-managed Pershing Square Holdings (LON:PSH) has consistently traded at a discount to NAV. But a recent period of underperformance has driven a notable de-rating, leaving the NAV discount wider than the one, three and five-year averages.
Disappointing H1 results revealed a 12.6% decline in NAV versus the S&P 500’s positive total return of 10.2%. Pershing Square runs a highly-concentrated portfolio. This means the fund’s performance is likely to differ materially from the broader index. Unfortunately, the fund also delivered a negative share price total return of 23.9% as the discount widened from 24.1% to 34%.
During H1, the only positive contributors to performance were Amazon (NASDAQ:AMZN) and Burger King owner Restaurant Brands (NYSE:QSR). The top detractors were Fannie Mae, Freddie Mac and Universal Music Group (AMS:UMG), with the latter sold during the period.
| AIC Sector: North America | Share price: £39.38 |
| Discount to NAV: -34.8% | 1-yr average discount: -28.3% |
| 3-yr average discount: -29.7% | 5-yr average discount: -30.6% |
Source: The AIC/Morningstar
The exciting news is Ackman and his team made six new investments in high-quality growth businesses during a busy H1, using market dips to buy best-in-class names on their shopping list. Should the quality growth style swing back into fashion, and these new positions perform, Pershing Square’s NAV would receive a strong boost. And this would drive a material re-rating of the trust.
Netflix: the sequel
The six new positions are Visa (NYSE:V), Mastercard (NYSE:MA), Alcon (NYSE:ALC), S&P Global (NYSE:SPGI), Intercontinental Exchange (ICE:NYSE) and also Netflix (NASDAQ:NFLX). Pershing Square briefly owned Netflix in 2022 before exiting the position. But Ackman has bought back in due to his belief that Netflix has effectively won the streaming wars.
Encouragingly, Pershing Square continued to make progress in its transformation of Howard Hughes Holdings (NYSE:HHH) into a diversified holding company. Howard Hughes has completed its acquisition of insurance company Vantage, which the fund supported through its investment of $1 billion of non-voting exchangeable perpetual preferred stock.
Wall Street titan Ackman is increasingly confident in the ability of the portfolio companies to deliver strong earnings growth, which would enhance NAV. And Winterflood’s Emma Bird sees ‘no good reason why a portfolio of large, liquid and cash-generative US stocks should be trading on a 33% discount’.
Bird sees scope for a re-rating, so long as performance improves. She notes that to help narrow the discount, Pershing Square Holdings’ board and managers are conducting a shareholder consultation, increasing marketing efforts and spending on share buybacks, with $1.9 billion worth of stock repurchased since 2017.
Oakley Capital Investments (LON:OCI)
Investment trusts with exposure to private assets are among those trading on the widest discounts. In part, this reflects investor fears about market conditions not being conducive to selling stakes in private holdings and difficulty in valuing private businesses.
Among their number is Oakley Capital Investments (LON:OCI). This private equity fund of funds focuses on buyout opportunities in the mid-market and lower mid-market space via the Oakley funds. ‘OCI’ is the best 10-year share price total return performer in the AIC’s Private Equity sector and one of the top five-year performers to boot.
Caught in the AI cross-fire
But OCI has slipped down the rankings on a one-year view after becoming unfairly embroiled in the agentic AI sell-off earlier this year. At the H1 results (30 July), OCI insisted this share price plunge was ‘unjustified’ given the portfolio’s limited exposure to software, supply chain disruption or price inflation.
‘Importantly, OCI continues to deliver long-term returns,’ stressed the managers. ‘Over the past 10 years, the company has achieved an annual compounding NAV and shareholder return of 15% and 16% respectively, reflecting the consistent value creation within the Oakley Funds.’
Importantly, OCI also reiterated the benefits its diversified portfolio of private companies is deriving from AI. OCI generated an NAV total return of 6% in H1. Compliance tester Phenna, sail specialist North Sails, semi-conductor analyst TechInsights and cybersecurity software provider Exaforce delivered the largest contributions.
| AIC Sector: Private Equity | Share price: 530p |
| Discount to NAV: -32.2% | 1-yr average discount: -29.3% |
| 3-yr average discount: -30.2% | 5-yr average discount: -29.7% |
Source: The AIC/Morningstar
Despite this respectable NAV increase, the share price plunged 16% in H1, a period when conflict in the Middle East rattled wider investor confidence. There is an argument that this sell-off looks overdone as earnings growth across OCI’s portfolio remains solid. Furthermore, AI appears to be creating opportunities rather than disruption for OCI holdings, and the fund’s liquidity looks adequate to meet commitments.
The shares are trading at a 32.2% discount to NAV. That is wider than the five-year average of 29.7%. Ongoing share buybacks are adding value. Unfortunately, investors will need to wait for rate cuts, or for sentiment towards private equity trusts to improve, before the discount narrows materially. In the interim, OCI could deliver some bumper exits, which would also help the rating.
Disclaimer: James Crux has a personal interest in Pershing Square Holdings.
