Winterflood Monthly Report - March 2020
Monthly Reports
Market sell-off sees discounts widen across trust sector
The market sell-off over the last few weeks has been dramatic. With the economic and social damage from COVID-19 almost impossible to determine at this stage, fundamentals appear to have been put to one side. The investment trust sector entered this year in remarkably fine fettle, but unsurprisingly discounts have widened over the last few weeks. The sector average discount was 5% at the end of last week compared with 1% at the start of the year. The vast majority of subsectors were de-rated in February, although there were exceptions, including Biotech & Healthcare, UK Equity Income and Renewable Energy Infrastructure.
It is always tempting to look for value opportunities in the investment trust sector at times like this, although we are conscious that these can be fleeting in fast-moving markets. We suspect that discount volatility may be with for us for some time yet, although, in our opinion, this is likely to be mitigated by the regularity and level of dividends that investment companies provide. Just under half of the sector is offering a yield of at least 4% at present.
In addition, there are signs that boards are more prepared to be proactive in their response to discount volatility. There is a train of thought that suggests that if they are prepared to issue new shares when their funds are on premium ratings, they should equally consider using buybacks to protect shareholders’ interests when necessary. Clearly this depends on the underlying asset class and general market conditions, but we believe that premiums or narrow discounts are worth preserving if possible. Indeed, going further, the question for boards is why let value-orientated investors determine where your shares trade?
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