The Lemon Fool

Hi all,

I have had quite a few IT’s on my watchlist for some time, and through luck still have some dry powder on the sidelines. I was assessing which IT’s might be most attractive in the turmoil, and notice there is a significant difference in the discounts for some of the trusts which look pretty extreme.

I appreciate that looking at the discounts has slightly less value in these volatile times given that we are comparing to the previous end of day NAV, but even still. Also some IT’s report NAV with debt at par value vs book value, but again, the differences below are so large it makes little difference.

JPMorgan Claverhouse - 1% premium
City of London - 0%
Mercantile - 13% discount
Temple Bar - 14% discount
Scottish American - 17% discount

A month or so ago these were trading at or close to NAV.

Anyone else think the divergence seems extreme? I get City’s long dividend record, but the same can be said for JPM, Mercantile, Scottish American. In fact, Scottish American if you look at the top 10 holdings has a bunch of what I would think would be pretty resilient companies (Coca Cola, Roche, P&G, Microsoft to name a few, and notably no oil or banks in top 10). City on the other hand has RDSB, BP, HSBC, Lloyds. But the discount tells a difference story.

Temple Bar I can to an extent understand, with Capita as top holding etc, although I have recently bought in. Mercantile I know less about, but seems to have had a good record until very recently.

Any thoughts on the above appreciated, do you think divergence in the discount here is justified, or an opportunity?

Personally I feel the latter.

Scottish American looks great, not been following it forever because of its premium, thanks for the info. I don't consider Mercantile to be on an amazing discount, Temple Bar is very wide but so are many others, check my other recent post out with a loose hypothesis for most of the movements (City of London and JPMorgan Claverhouse seem to be outliers!) in the penultimate paragraph.

edit: the bid/offer spread at close, based on the LSE website, for Scottish American yesterday (19th March) was 261p bid, 272p offer, a 4% spread is huge. This goes someway to explaining the large discount, you're giving a good chunk back in the spread, still a very good discount though.

mm

In a world where major indices are moving >10% in a day, NAV updates via RNS that lag days behind can lead to unreliable quoted discounts. Be sure to adjust 'official NAV' with your own estimates to reflect events of the day.

Also, consider adjusting to reflect the wide spreads we see currently from MMs, another 2-3% gap potentially.

Thanks for the replies. Scottish American was the one that stood out to me as well.

csd2020 wrote:In a world where major indices are moving >10% in a day, NAV updates via RNS that lag days behind can lead to unreliable quoted discounts. Be sure to adjust 'official NAV' with your own estimates to reflect events of the day.

I hear you, although FTSE all share and S&P 500 were actually up marginally yesterday so my thinking is that should narrow the discount as the share price rises relative to the previous day NAV. Perhaps at the portfolio level the movements are a bit different to the indices, but overall I think those discounts are broadly “real”.

Thanks both for pointing out the spreads though, I had not spotted that, and Musing, excellent post on the other thread. I was previously tempted by Mercantile but perhaps I will reconsider.

Bathonian wrote:Thanks both for pointing out the spreads though, I had not spotted that, and Musing, excellent post on the other thread. I was previously tempted by Mercantile but perhaps I will reconsider.

I think Mercantile (MRC) is an excellently managed trust btw, just specifically the discount at time of writing (it was 11-12%) wasn't particularly exciting. Certainly not at time of typing, with MRC up high teens % along with Henderson and Blackrock smaller (of course, this could reverse if the FTSE 250 went down, rather than up, 7%).

mm

Understood. I was looking at Mercantile to offer some midcap exposure as I am shifting the bulk of my portfolio to global passive, with some active IT’s on the side.

I work for a financial institution that requires pre-clearance for trades which can take some time, so I was not able to buy any of the trusts mentioned before today’s bounce! I may wait for a little longer and see where things shake out.

I am sceptical that with the rapid movements in SP's, whether discount figures shown are accurate or up to date.

I like and hold Mercantile, though I note it has National Express amongst it's top ten holdings, which I would think will suffer in the current CV91 restrictions. That said, I doubt there will be any IT's that don't hold some stock(s) likely to be affected by the CV.

richfool wrote:I am sceptical that with the rapid movements in SP's, whether discount figures shown are accurate or up to date..

They usually aren't. Personally I calculate an estimated NAV based on the previous days' closiing NAV (this can be frustrating because it means waiting for the IT's publication of the numbers) and then adjust the printed NAV (cum-income, fair value) by how the, most relevant, index has done since and any sizeable currency movement to get a rough but pretty decent idea of the intra-day NAV. Obviously, this approach only applies to investment companies that contain equities, bonds and other assets that are repriced often.

mm

The discounts on many ITs are huge, aren't they? In my portfolio of 11 ITs the discounts now range from 10% to 30%.

I'm not an expert on this, but might not the large discounts be the market pricing in further falls in NAV?

bluedonkey wrote:I'm not an expert on this, but might not the large discounts be the market pricing in further falls in NAV?

That's basically it. What market makers of IT shares there are - and there aren't all that many - do not want to be caught on the wrong side if the market decides share prices of underlying IT portfolios have further to fall. While in the medium-to-long term it is investors' supply and demand that dictates what discounts of ITs will be, in the short-term it's the market makers who call the tune. What one is seeing is an extreme example of market makers reacting to an unknown outcome in such uncertain times. Remember market markers do not have an investor's mentality, they are middle-person traders making a market. The last thing market makers want to happen is to find themselves with an oversupply of stock on their books. Market markers of IT shares would rather heavily discount stock now, while the wider market is deciding in which direction to go, rather than wait.

forrado wrote:

bluedonkey wrote:I'm not an expert on this, but might not the large discounts be the market pricing in further falls in NAV?

That's basically it. What market makers of IT shares there are - and there aren't all that many - do not want to be caught on the wrong side if the market decides share prices of underlying IT portfolios have further to fall. While in the medium-to-long term it is investors' supply and demand that dictates what discounts of ITs will be, in the short-term it's the market makers who call the tune. What one is seeing is an extreme example of market makers reacting to an unknown outcome in such uncertain times. Remember market markers do not have an investor's mentality, they are middle-person traders making a market. The last thing market makers want to happen is to find themselves with an oversupply of stock on their books. Market markers of IT shares would rather heavily discount stock now, while the wider market is deciding in which direction to go, rather than wait.

Interestingly, I have noticed an increase in RNS notices confirming the issuing of shares in recent days, before these were stating shares were being bought back. All to control the discount of course. So looks like there are buyers out there.

SoBo65 wrote:So looks like there are buyers out there.

Indeed there are buyers out there, and some may well be buyers of ITs. I have been reading reports, like the linked one in Daily Telegraph below, that the likes of ii, AJ Bell and HL report 70% of trades are on the buy side.

https://www.telegraph.co.uk/investing/shares/buying-scottish-mortgage-lloyds-investors-keep-cool-coronavirus/

forrado wrote:

SoBo65 wrote:So looks like there are buyers out there.

Indeed there are buyers out there, and some may well be buyers of ITs. I have been reading reports, like the linked one in Daily Telegraph below, that the likes of ii, AJ Bell and HL report 70% of trades are on the buy side.

https://www.telegraph.co.uk/investing/shares/buying-scottish-mortgage-lloyds-investors-keep-cool-coronavirus/

Seen more RNS's today issuing equity - PNL,FGT.

forrado wrote:AJ Bell and HL report 70% of trades are on the buy side.

But wouldn't each one of those trades also have a seller?

Maybe it work like this..

One person sells 10,000 shares = 1 SELL trade

These 10,000 shares are bought, in total, by many people = many BUY trades.

No, a trade is labelled as a 'buy' or a 'sell' depending on whether it was closer to the ask or the bid price current at the time of the trade. It should only be regarded as a rough guide, not an accurate classification of each trade, particularly when the spread is narrow.

The bid-ask spread is essentially the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept. An individual looking to sell will receive the bid price while one looking to buy will pay the ask price.

https://www.investopedia.com/terms/b/bid-askspread.asp

Avantegarde wrote:The discounts on many ITs are huge, aren't they? In my portfolio of 11 ITs the discounts now range from 10% to 30%.

From past experience, it's fairly normal for discounts to widen in a bear marker, then slowly recover in a bull market.
I consider 10~30% to be perfectly reasonable.

The range of my trusts is between 5 and 31%.

I also note that FEET was only available on a premium for a couple of years, which discouraged me from adding to a small position. With a combination of very modest performance and the bear market, it's now available on an 18% discount. As with every investment strategy, the excellent methods promoted by Terry Smith do not work all of the time in all markets.

The discounts present a good opportunity for anyone either keeping cash back for a bear market and also for anyone making regular monthly purchases.