Investment trust share prices vulnerable to market shake-out

Investment trust share prices could be vulnerable to a change in investor sentiment as the average discount narrows to 5 per cent, a new report warns.

The Monks Trust is currently trading at a 2 per cent discount compared to a 12-month average of 9 per cent, while Scottish Mortgage’s entry into the FTSE 100 has seen its premium rise to 5 per cent from 2 per cent.

But a Stifel report says share prices relative to net asset value arenearing the highest average levels in 15 years leaving many narrowed discounts or rising premia vulnerable to a stock market shake-out.

In the immediate aftermath of the UK’s vote to leave the European Union average discounts dropped to 11 per cent, but forex gains and buoyant stock markets have delivered strong capital gains in the period since, the report says.

Europe and European Smaller Companies are the only sectors to have seen any material widening in the the last year with current discounts of 7.3 per cent and 10.7 per cent respectively.

In contrast, 11 sectors have seen discount narrowing in excess of 2 per cent, with the largest re-rating in Private Equity, Renewables and Financials.

Last year the Private Equity sector discount reached 29 per cent, but is currently sitting at 9.2 per cent. Financials are trading at a 2.3 per cent discount compared to an all-year low of 14 per cent.

Some of the share price moves could be attributed to discount control mechanisms, the report says. For example, Foreign & Colonial IT now targets a discount level of 7.5 per cent for share buybacks, compared with 10 per cent previously.

The Infrastructure and Renewable Energy sectors, which are trading on premium to NAV, are accounting for an increasing percentage of the total sector market cap at 11 per cent.

Infrastructure currently trades at a 10.2 per cent premium, but has reached 20.6 per cent in its peak over the last year. Its lowest premium hit 7.9 per cent.

Renewables hit a discount of 3.9 per cent at one point during the year, but hit a premium of 10.9 per cent and now trade at a 9 per cent premium.