This season is getting really rich – if you get hold of a discounted fund bargain

Share prices have fallen sharply in recent days in response to fears about a possible economic disruption that the new Omicron variant of Covid could cause.

While stocks in certain sectors such as airlines and travel were hardest hit, investment trusts’ share prices have also fallen. However, some investment professionals believe that what has happened over the past nine days is now an opportunity for brave investors looking to buy such trusts. This is because many mutual funds’ share prices no longer reflect the true value of the assets that sit under their hoods. In other words, they represent bargain purchases.

Here are the points to consider when identifying real “bargain” investment trusts.

Seasonal shoppers: The stock prices of many mutual funds no longer reflect the true value of the assets that sit under their hoods


Mutual funds are companies listed on the London Stock Exchange. To invest in one, simply buy some of your shares and put them in your individual savings, pension or general investment account.

They can be bought through most investment platforms such as AJ Bell, Hargreaves Lansdown, and Interactive Investor.

However, unlike other publicly traded companies, mutual funds are made up of a portfolio of underlying investments that are handpicked by a fund manager.

The Scottish Mortgage Investment Trust, for example, is its own FTSE100 company, but has stakes in 101 companies from around the world, from Covid-Jabs manufacturer Moderna to shopping giant Amazon.

The unique structure of mutual funds means that the value of their shares is sometimes higher or lower than the value of their underlying holdings.

This is known as trading at a premium or a discount.

For example, if the trust’s assets are worth £ 1 but the stocks only sell for 90p, investors can buy £ 1 for just 90p – a 10 percent discount.

Annabel Brodie-Smith, director of the Association of Investment Companies, says more than two-thirds of investment companies trade their stocks at a discount. “There is plenty of choice for investment company bargain hunters,” she says.


You can find out whether an investment fund is trading at a discount in the current monthly fund factsheet, which is available from the fund provider.

Alternatively, information websites such as Trustnet and Morningstar make this information available, as do all major investment platforms.

However, this information alone is not enough to decide whether or not the discount makes sense.

Kyle Caldwell, fund expert at Interactive Investor wealth platform, recommends that investors also check whether the discount is smaller or larger than usual and how the discount compares to other trusts with similar investment mandates. “If the discount is bigger than its competitors, this could be an attractive entry point,” he says.


Finding the best deals isn’t just about finding the biggest discounts. Sometimes mutual funds are cheap for good reason and investors should stay away. The key is to find mutual funds that are really undervalued – where the discount doesn’t feel justified and you expect it to decrease over time.

Darius McDermott is Managing Director of the investment scrutineer FundCalibre. He says the only way to find these opportunities is to look at mutual funds on a case-by-case basis.

“The bottom line is you can get a bargain by buying a trust at a discount, but that won’t always be the case,” he says. “You have to research each trust carefully.”

One situation to look out for is when a major shareholder is selling a large number of shares at once. The sudden abundance of stocks in the market can temporarily drag their value down before they settle down to return to their usual trend.

Jason Hollands, Managing Director of investment platform BestInvest, says, “If the trust moves to a large discount that is bigger than it normally trades, this could be a great opportunity for new investors to get some stocks at a cheap price.”

To be sure that the haircut will diminish over time and the value of your stocks rise, you should know that the foundation of the trust is solid.

For example, you need to verify that the trust has a strong management team and an investment strategy that you trust.

Some mutual funds have a policy of buying back stocks when they reach a certain discount, for example five or ten percent.

Caldwell suggests that eagle-eyed investors can take advantage of this by buying stocks just before the buyback begins. “That way, investors can enjoy the discount knowing that it won’t widen much after buying.” ,’ he says.


As with all offers, sometimes an offer is too good to be true. Big discounts can indicate worrying problems lurk beneath the surface.

For example, this may mean that investors lose confidence in the trust’s investment strategy and sell stocks in the expectation that the value of the trust’s holdings will decline in the future.

This can even be a sign that investors are skeptical of the accuracy of the fund’s valuation numbers. Valuing a publicly traded trust is easy. However, valuing a trust made up of unlisted companies or real estate is more complicated.

Large haircuts can also indicate that a trust has too much debt (borrowing to fund major investments in stocks) or that there are significant problems with some of its underlying holdings. Investors need to be careful when investing in such trusts.


Interactive Investor’s Caldwell likes the Temple Bar and Edinburgh trusts – both UK equity income trusts managed by RWC Asset Management and Majedie Asset Management, respectively.

The average trust in this category trades at a 3.7 percent discount, but these two funds both trade at a 7.9 percent discount and at slightly higher discounts than their 12-month averages.

“Both of them have improved significantly under the new management,” says Caldwell. “But they continue to trade at discounts that are greater than those of their competitors.” Temple Bar stocks are up 4.2 percent and Edinburgh 13.6 percent in three years.

McDermott likes the high dividend City of London, run by Janus Henderson Investors. Its stocks usually trade at a premium, but currently at a small discount. It has generated a return of 12.1 percent over three years. James Carthew, fund expert at research firm QuotedData, likes Ceiba Investments, a specialist trust company that is riskier but can get good over time.

Ceiba Investments is buying companies in Cuba and its shares are trading at a large discount. The underlying holdings are valued at 95p per share, but the shares are currently only trading at 65p.

“The administration of US President Joe Biden should relax the sanctions imposed on Cuba by the Trump regime, but it has not succeeded,” says Carthew. “In the meantime, local unrest is increasing. It may take a while for this situation to resolve on its own, but if it does, the discount could be closed. ‘

Carthew also likes the former Woodford Patient Capital Trust, which has now been recognized as a Schroder UK Public Private. Trust has been a name to avoid in the past, and it has downsides too.

For example, it has a concentrated portfolio that is exposed to the fate of a few companies, and much of the holdings are illiquid, which means they are difficult to buy and sell in a rush.

“This will be handled by the trust’s new managers,” says Carthew. The stock trades at a discount of 32 percent, and although it has lost 61 percent of its value in three years, it is down 32 percent this year.

Several commercial real estate mutual funds are trading at discounts as the sector continues to face uncertainty due to changing patterns of work and shopping. Many retailers are struggling with the trend towards online shopping, while offices are affected by changing work habits.

For those who think commercial real estate development could rebound, Hollands cites the UK Commercial Property REIT (Real Estate Investment Trust) – which trades at a 22 percent discount – as an example of a well-managed fund that trades at an attractive discount is traded.

The share price is up 1.3 percent in three years, while the value of the underlying holdings has increased nine percent over the same period.


Temple Bar mutual fund investors have had a tough time in recent years. The focus on out-of-favor value investing, a change in investment manager and the market turmoil early last year have taken their toll.

But some smart – brave – investors have benefited from this disruption by buying their stocks when they were out of whack with the value of their assets – and then holding onto them. For example, in early June last year, the shares were valued at £ 8.68, compared to the value of underlying assets of £ 10.03. In other words, the stock was trading at a discount of 16 percent.

This compares to last week when the shares were trading at £ 10.94 and the assets were valued at £ 11.64, a 6 percent discount. By closing the gap between stock and asset prices, shareholders who bought in June 2020 saw an investment return of just over 26 percent, compared to a 16 percent increase in the value of underlying assets.

Of course, it’s important to know when to buy the stocks and at what discount.

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