Since the beginning of the year the discount of the average investment company1 has widened more than 10 percentage points – from 3.6% on 31 December 2021 to 14.3% on 18 November 2022.
With almost all investment company sectors on a discount, the Association of Investment Companies (AIC) has published a list of average discounts across all equity and alternative sectors.
Out of 38 sectors2, only the Hedge Funds sector trades at a premium, of 3.8%. The sector is one of this year’s best-performing, with several of its constituents delivering for investors in turbulent times.
The most deeply discounted equity sector is North America, on a 26.5% discount, followed by India on a 14.9% discount and Global Emerging Markets on 12.4%.
Discounts for alternatives sectors can be misleading, as they are based on current share prices and the most recently reported net asset values, which can be out of date. However, as it stands the most deeply discounted alternatives sector is Growth Capital on a 43.4% discount, followed by Property – Europe on 42.8%. To help interpret the discounts on alternative asset sectors, the AIC has collated analysts’ comments below. Discount moves in 2022 Among equity sectors, the biggest discount changes in 2022 have been in the Biotechnology & Healthcare and Technology & Media sectors, where discounts have widened by 9.2 and 8.5 percentage points respectively.
The alternatives sectors that have seen the biggest widening of their discounts are Property – UK Logistics (47.0 percentage points) and Property – Europe (42.2 percentage points). Do these discounts offer value? To offer their thoughts on whether investment company discounts currently offer value, and where the best value is to be had, the AIC has collated comments from analysts who specialise in investment companies. Comments were gathered from Myrto Charamis,Co-Head of Investment Companies at Berenberg; Anthony Leatham,Head of Investment Companies Research at Peel Hunt; Priyesh Parmar,Associate Director of Investment Companies Research at Numis;and Iain Scouller,Managing Director of Investment Funds at Stifel.Their thoughts can be found below the tables. Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Discounts are currently wider than usual and this can present buying opportunities. However, investors need to consider whether an investment company’s strategy meets their objectives. They also need to take into account other factors such as the investment company’s performance record, charges and gearing. If investors are in any doubt, they should speak to a financial adviser.” All investment companies
Source: www.theaic.co.uk / Morningstar. Weighted averages for AIC sectors with at least three constituent companies. Alternatives sectors (widest discount first)
Discount on
18 November 2022 (%)
Discount on
31 December 2021 (%)
Change since 31 December 2021 (% pts)
Growth Capital
-43.4
-3.6
-39.9
Property – Europe
-42.8
-0.6
-42.2
Insurance & Reinsurance Strategies
-36.2
-22.7
-13.5
Property – UK Residential
-35.4
0.4
-35.8
Property – UK Logistics
-32.7
14.3
-47.0
Leasing
-30.2
-24.2
-6.0
Property – UK Commercial
-25.6
-10.3
-15.3
Private Equity
-24.8
-1.4
-23.4
Debt – Direct Lending
-17.4
-6.1
-11.2
Property – Debt
-16.1
-7.2
-8.9
Debt – Structured Finance
-10.5
-10.7
0.2
Debt – Loans & Bonds
-5.3
-4.2
-1.1
Infrastructure
-2.3
14.3
-16.6
Renewable Energy Infrastructure
-1.5
6.5
-8.0
Hedge Funds
3.8
-1.8
5.5
Source: www.theaic.co.uk / Morningstar. Weighted averages for AIC sectors with at least three constituent companies. Flexible sector
Discount on
18 November 2022 (%)
Discount on
31 December 2021 (%)
Change since 31 December 2021 (% pts)
Flexible Investment
-19.5
-16.2
-3.3
Source: www.theaic.co.uk / Morningstar. Analyst comments: equity sectorsAnthony Leatham, Head of Investment Companies Research at Peel Hunt, said: “These are volatile times and the discount picture is evolving on a week-by-week basis.
“Whilst it feels like a ‘marmite’ choice at the moment, China cannot be ignored. We would highlight Fidelity China Special Situations trading on an 11% discount. A recent update from the manager – Dale Nicholls – points to some of the cheapest valuations across the underlying portfolio companies that he has seen in a long time. Investors are looking for a shift in policy focus to support growth and any positive action could act as a catalyst for a re-rating.” Priyesh Parmar, Associate Director of Investment Companies Research at Numis, highlighted the opportunities he sees in Vietnamese specialist investment companies in the Country Specialist sector. He said: “The economy is performing strongly and inflation remains below the central bank’s 4% target. The reasons for the sell-off appear concentrated in an area of the market to which the listed funds have no direct exposure. Therefore, we believe this presents a strong buying opportunity. As Vietnam appears on the radar of more generalist investors this should provide a positive backdrop for the country and we believe there is potential for a tighter discount on the listed funds to be more sustainable in future. Furthermore, investors have the potential future catalyst of MSCI Emerging Markets inclusion, albeit this is at least a few years away.” Analyst comments: alternatives sectorsIain Scouller, Managing Director of Investment Funds at Stifel, said: “Despite some very strong NAV performance in recent years, many of the private equity funds were trading on discounts of 15% to 25% at the start of 2022. Whilst some haircuts to NAVs are to be expected in this environment, we think discounts are excessive. Even on a ‘worst-case’ view we do not anticipate writedowns in excess of -15% to -20%, which suggests discounts in a worst case are still 20% to 30% post any writedown. In an alternative scenario, where we see rising equity markets going into the 31/12/22 valuation point, we may actually see NAV increases on the funds over the second half of 2022. We also suspect the likelihood of corporate activity in the sector, such as takeover approaches is increasing, and if this materialises, we would expect a substantial positive sector re-rating.” Myrto Charamis, Co-Head of Investment Companies at Berenberg, said: “I think there are many opportunities within the alternatives investment companies for investors to scoop up high quality strategies at very attractive valuations.
“For investors who are mainly looking for long-term capital appreciation I believe listed private equity is very cheap trading at an average discount to NAV of 30%. The sector, in my view, provides a lot of headroom for investors who believe valuations are too high.
“For investors who are mainly looking for yield, I believe there are a few great opportunities within the debt and renewables sectors which can compete with the current corporate debt yields. We note BioPharma Credit, which is trading at an 8% discount to NAV with a yield of 7.3%. It provides investors with predictable and uncorrelated returns through its unique strategy of investing in debt assets (primarily senior secured and royalty) in the life sciences industry. Real Estate Credit Investments is trading at a 9% discount with a yield of about 9%. It aims to deliver a stable quarterly dividend with minimal volatility, across economic and credit cycles by originating and investing in real estate debt secured by commercial or residential properties in Western Europe, focusing primarily on the UK, France and Germany. In the renewables sector I believe Harmony Energy Income Trust is the best opportunity with a yield of 7.2% trading at a 4% discount to NAV. It targets a 10% NAV total return, unlevered, by providing investors with unique exposure to two-hour duration grid scale battery energy storage systems in Great Britain which support the resiliency and flexibility of the energy system as the penetration of intermittent renewables increases.” Anthony Leatham, Head of Investment Companies Research at Peel Hunt, said: “Inflation and rising rates have caused a broad rebasing of expectations across a number of sectors. We see value across renewables (here we highlight Octopus Renewables Infrastructure Trust with its diversified pan-European portfolio) as well as other real-asset strategies including the shipping trusts – Tufton Oceanic Assets and Taylor Maritime Investments, which are trading on deep discounts with generous, well-covered yields and a relatively active secondary market for their underlying investments compared with other real asset classes.
“Private equity trusts have followed the playbook of previous market corrections by selling off into a period of risk aversion. Given the inevitable lag in valuations, particularly across the funds of funds, we have compared the share price performance against NAVs lagged by four months. This data suggests that, whilst the market is quick to price in bad news, there is a consistent tendency to over-compensate. Our pick in the sector is HarbourVest Global Private Equity, which has delivered 23% annualised NAV total return over the last five years and is trading on a 45
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