Move from passive to IT's

[moneybagz]

Hi,

I'm new to IT's but with discounts widening I'm tempted to switch some money from passives. Could discounts widen further from here or has most of the damage been done? Are certain investments best suited to IT's rather than funds, for example, smaller companies?

Many thanks

[Mememe]

I believe in the passive argument. But I also know some managers outperform

So I use passives for large cap (50% of portfolio). And investment trusts for small cap, prop, and private equity. My view is that most IT outperformance comes from leverage, but I don’t care where it comes from so long as I get it.

Don’t think you’ve missed the boat on discounts. For me investments trusts are riskier with premiums/discounts, debt and if you are going off piste (like small cap/PE etc) then that should be your IT exposure, with vanilla markets passive

Depends how much stuff outside large cap you want. If you invest in largely large cap I’d stick to passives.

[moneybagz]

Thanks mememe, yes thats exactly what I'm planning, putting 50% in large cap developed world passives, and spreading the rest over some IT's picking up emerging markets, smaller companies, property, with a tilt towards value. I've just been researching IT's and came across RIT Capital Partners which apparently performs well during market crashes?? It has moved from an average premium of 7% to a discount of 25% during this latest crash. I can't understand how an IT could swing so wildly. Can you shed any light on this? Thanks

[Spet0789]

Thanks mememe, yes thats exactly what I'm planning, putting 50% in large cap developed world passives, and spreading the rest over some IT's picking up emerging markets, smaller companies, property, with a tilt towards value. I've just been researching IT's and came across RIT Capital Partners which apparently performs well during market crashes?? It has moved from an average premium of 7% to a discount of 25% during this latest crash. I can't understand how an IT could swing so wildly. Can you shed any light on this? Thanks

More sellers than buyers. It’s that simple.

[MusingMarket]

I've just been researching IT's and came across RIT Capital Partners which apparently performs well during market crashes?? It has moved from an average premium of 7% to a discount of 25% during this latest crash. I can't understand how an IT could swing so wildly. Can you shed any light on this? Thanks

You're looking at a NAV based on February 29th the last time RIT Capital Partners officially gave its NAV. A lot has happened since then!

Discounts always widen when markets drop, it seems more impactful now because so many Investment Trust boards say they want to limit or eliminate discounts when they simply can't deal with the market's volatility, at least in the short-term, during these times.

A quick 'if I recall correctly' on discounts over the past couple of decades:

UK Equity Income - still not great discounts barring Edinburgh and Perpetual Income & Growth, both used to be Invesco (Woodford legacy) but Edinburgh is now managed by Majedie (March 4th was some day to take over!). Deep value but probably as risky as the next lot...

UK Smaller Companies - pretty much the long-term norm to be in a mid-to-high teen discount. Less liquid underlying holdings means you should expect a bigger discount. Going to par or even a premium after the Boris bounce was a short-lived anomaly. Be careful with these, generally bigger falls than other sectors and could be a very painful knife catching exercise. However, a basket of the larger trusts (Henderson Smaller, Blackrock Smaller, Standard Life UK Smaller and Aberforth Smaller) will do very well if we don't see Armageddon. But, I wouldn't buy these betting on discount shrinkage. These trusts generally do have managers that long-term beat the average, imho, because efficient market hypothesis isn't as efficient for smaller companies with less eyeballs on them.

UK All Companies - only really follow Mercantile which I consider more a mid-cap trust, its still below the mid-teen discount I'd expect. Fidelity Special Values looks okay but not a discount play. Independent is really a small-cap fund, very volatile. Many of the trusts in this sector are minnows with a very low market cap which means a large bid/offer spread and higher expenses.

Global Growth - generally slightly higher discounts than the 2000s, especially for F&C, Alliance Trust reached a 25% discount in October/November 2008 (I believe the ultra-cautious Personal Assets Trust bought Alliance shares then!) but they were lax about buying back shares a decade ago so may offer value with a mid-teen discount. Scottish Mortgage and Monks on a 10-12% discount was usual before the great recession but obviously the out performance of Scottish Mortgage over the past decade and Monks over the past five years has seen par or slight premium as the recent norm. I could write a silly amount about Scottish Investment Trust, trying to stick to an 8% discount, currently 24% discount, certainly above its long-term average. WItan on a 12% discount is where it was in the 2000s, again a high discount based on the last few years.

Global Income - only really follow Murray International - it hasn't been on this discount since the early days of Bruce Stout's reign a long time ago.

Flexible Investment - Where you'd expect? RIT Capital and Caledonia are hard to value given the out-of-date NAVs and it's very much a Do Your Own Research. Ruffer and Personal Assets are protecting so trading where you'd expect. Hansa and New Star are interesting given the huge discounts since you'd think they'd have to have some corporate action at some point - the underlying assets are reasonably liquid - however both have been stuck at a 30% discount for a while, so 40% discount...shrugs. Both Hansa and New Star used to be in vogue a long time ago, discounts can stay stuck.

Property - I don't follow sorry, be careful with the NAVs, they're likely well out of date. TR Property Trust is different since its a trust of property companies. The discount's volatility isn't unusual when there are big falls though far higher than when things are calm. TR Property does very well in the good times, very bad in the bad - that's the case now and was the case during Brexit and the great recession.

Others - a lot of specialist sectors that a newbie should probably avoid.

Personally I think there has been some dislocation with algos selling the FTSE 250 and All-Share trackers wholesale and possibly, for the global trusts, not taking into account the big drop in Sterling (this happens, see the day after the Brexit vote when FTSE blue chips sold off, on top of the Sterling drop, when the vast majority of their revenue came from overseas). F&C being the largest FTSE 250 IT (at least before the recent falls) and its discount has widened perhaps the most outside of specialist ITs. Scottish Mortgage, being in the FTSE 100 hasn't seen its discount widen anywhere near as much (yes very different IT nowadays but the discount widening has been rather indiscriminate). Many ITs have seen price monitoring extensions at close and a sizeable drop in the closing auction compared to the last trade in market hours these past two days, this isn't normal.

I can't and wouldn't want to offer advice on what to buy, I would say avoid any trust that seems exotic, small (the trust's own market capitalisation), has opaque, illiquid underlying assets, has an unusual structure (including split-caps) or has a lot of debt. Newbies should stick to the large trusts in the main AIC sectors on theaic.co.uk website.

mm

[moneybagz]

Thanks for the really helpful reply, much appreciated