My tweet on UK Smaller Co ITs (Investment Trusts) gathered a lot of interest. I said that I was seeing a lot of trusts on discounts over 20%, which I thought was unusual.
I would have expected 10-15% to be about the norm. These are the kind of figures that made sense from memory.
I actually pulled out the accounts for JMI (JPMorgan Smaller Companies Investment Trust). Their 10 year record is on page 11:
That’s a mean figure of 18.9%, and a median of 18.3%. A lot higher than I expected.
A good tip, by the way, is to look at the Hargreaves Lansdown website for the latest discounts (sorry, Stockopedia). The NAVs are updated regularly.
JMI pays a yield of 2.2%, and has actually acquited itself well. Over 10 years (to 31st July), it is up 102% compared with the FTSE Small Cap Index, which is up 73%. The latter figure looks wrong to me, because Google is indicating that the Small Cap Index is up only 32%:
I know there’s a timing issue between July 2016 and December 2016, but I have checked, and it does not explain the difference. Perhaps the figures are for total return, which of course over 10 years might plausibly double that figure. JMI, OTOH, is up 86% in 10 years to 29 December 2016, excluding dividends.
Please note that I am not trying to tout JMI specifically. I am just using it as an example. Certainly if you had held JMI over the last decade you would have no reason to complain.
It seems, therefore, that making a trade based on discounts in ITs is more difficult than I imagined initially.
Parenthetically, I notice that Stockopedia reports that the trailing PE of the FTSE SmallCap Index is 14.7, and there is a dividend yield of 3.6%. I never use forecasts, because projected growths are ludicrously high. Nevertheless, despite fears of BrExit, the American elections, and so forth, a PE of 14.7 seems like fair value to me. There must be some good choices to be had there.
The trailing PE of the Footsie is 20.4, with a yield of 2.9%.Does that mean investors should stick with the small-caps? I’d say “yes”, but with some qualification. It’s complicated by the fact that there are such things as oilies. RDSB (Royal Dutch Shell), for example, is trading on PEs of 34. That might merely be a reflection of the depressed environment in which it operates, rather than a reflection of an overheated market per se.
But I digress.
It’s actually difficult to obtain 10 year figures for ITs. The financials of THRG (Blackrock Throgmorton) and DNDL (Dunedin Smaller) did not show them. I have not check all of the companies.
ASL (Aberforth Smaller Companies) did publish 10-year figures, though:
The summary statistics were much more as I expected: mean discount was 12.8%, and median was 13.4%. 10-year annual performance was +52%; a disappointment especially since the discounts were not that large. ASL currently trades at a discount of 14.6%, with a 12m average of 13.3%.
Let me go through the AIC stats for UK Smaller Cos and tabulate the discounts as they are reported at HL (Hargreaves Lansdown). The discounts should be pretty reliable and up-to-date, absent the fact that the analysts are probably busier right now scoffing down the mince pies than calculating the NAVs of their trusts:
EPIC PERF10 DISC DISC12 ASL 52 -14.6 -13.2 Aberforth Sm Cos ATY 35 -10.0 -8.8 Athelney BRSC 163 -16.4 -14.3 Blackrock Sm Cos THRG 104 -18.5 -16.9 Blackrock Throgmorton DNDL 37 -20.0 -17.4 Dunedin Smaller GHS -74 -25.9 -32.6 Gresham House HSL 127 -14.7 -14.5 Henderson Smaller IPU 123 -5.7 -6.0 Invesco Perp UK Smaller JMI 86 -18.7 -17.7 JPMorgan Smaller MINI NA -2.1 +0.6 Miton UK Microcap MTU 45 -21.1 -18.7 Montanaro UK Smaller RIII -8 -12.5 -16.2 River & Mercantile UK Micro [1] SLS 208 -7.1 -5.7 Standard Life UK Smaller SEC 109 -9.3 -6.0 Strategic Equity KEY: PERF10 - share price performance over decade DISC - premium/(discount) to NAV DISC12 - average premium/(discount) over 12m [1] Some odd movements in share price
Purely as a matter of subjectivity on my part, let me pull out the “big guns” that everybody has heard about:
EPIC PERF10 DISC DISC12 BRSC 163 -16.4 -14.3 Blackrock Sm Cos THRG 104 -18.5 -16.9 Blackrock Throgmorton DNDL 37 -20.0 -17.4 Dunedin Smaller HSL 127 -14.7 -14.5 Henderson Smaller IPU 123 -5.7 -6.0 Invesco Perp UK Smaller JMI 86 -18.7 -17.7 JPMorgan Smaller SLS 208 -7.1 -5.7 Standard Life UK Smaller
The discounts look more in line with what I might be expecting.
DNDL has had a disappointing-looking 10 years. Over 5 years its NAV is up 99%, compared with the benchmark up 129%. That may account for its wide discount. Its top ten share picks look sane to me, so who knows, maybe the market is over-discounting the trust.
IPU has had very narrow discounts, which, offhand, looks like poor value in relation to other choices.
Conclusions? Hmmm, I’m not sure what I conclude out of all this. Answers in the comments section below, please. At least I have given you some additional food for thought.
Mark Carter's blog 
Mark
The Epic code RIII refers to Rights and Issues Investment Trust and not River and Mercantile.
Oh, and a happy and successful New Year to you and yours
John H
Some of the trusts have active buy back schemes to maintain the discount within certain limits e.g. SLS I believe. So this will make a big difference compared to trusts that do not e.g. JMI. So a better measure may be to compare the discount to its long term historical average. Indeed most of the trusts that do not employ any sort of buy back scheme do indeed currently trade at a high discount to this historical average. This does suggests a current lack of interest in the UK small cap sector perhaps.