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Discount deals

Investing in closed-ended funds over the past 20 years provides a good deal of perspective on the investment trust cycle and I find it inconceivable that discounts will remain as wide as they are at present.

It has been surprising to see trusts trading on double-digit discounts without coming under attack but the discount cycle has remained alive and well.

The last 12 months have proved painful but the consolation is that the spectacular profits that been made from trading investments in the past remain achievable in the future.

One factor behind the slide in the share prices of some trusts has been that arbitrageurs found they were on the receiving end of redemptions and also found their prime brokers no longer felt comfortable with the heroic leverage they had previously been happy to fund and forced them to degear. Activist investors were turned into forced sellers.

Aurora is a trust we have known for many years which specialises in UK equities and operates with a growth style. It was a successful investment during the late 1990s but has struggled in recent years.

The fund is vulnerable to attack unless results improve. Building a stake on a deep discount offers investors an each-way bet. If the numbers improve, so will sentiment, triggering a powerful combination of a rising portfolio value and a narrowing discount. If performance fails to pick up, Aurora may succumb to activists and investors will benefit from an exit close to the fundamental value of the assets.

Macau Property Opportunities was launched in 2006 at 100p per share with the ambition of developing sites in the former Portuguese colony which is the only place in China where gambling is legal.

Given the restricted space available and the gaming industry’s expansion plans, demand for residential properties remains underpinned. The trust’s assets have risen by around 30 per cent since incorporation but the shares can be acquired for a significant discount. It is a topical example of how a trust’s market price can lose all touch with its portfolio’s fundamental value.

During market turmoil, the investment trust sector is harshly treated. Investors entering at such a point enjoy the enormous buffer of a big discount. A lot can go wrong before absolute money is lost. Discounts will narrow naturally or hostile opportunist investors will do it. Once markets move on from overwhelming bearishness, investment trusts will comfortably outperform.

Nick Greenwood is manager of the CF Midas Accelerated Fund

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