UK trusts leap as Brexit deal raises hopes of orderly divorce

(Update) UK equity investment trusts jumped up to 6% in the first 90 minutes of trading today in response to the reported breakthrough in Brexit talks.

With Downing Street briefing that the UK and European Union had finally reached an agreement on the contentious areas of fishing and arbitration, many UK-focused investment trusts, which have laboured under a Brexit cloud for over four years, notched up gains of over 2%.

This was well ahead of the UK stock market indices, which after an early spurt, subsided. By 9.30am the FTSE 100 was 11 points or 0.2% to 6,506, the mid-cap FTSE 250 had gained 0.6% and the FTSE Small Cap 0.8%.

Henderson Smaller Companies (HSL) led the closed-ended fund rally on the FTSE 250, up 5.2% or 52p to £10.55, followed by Aberforth Smaller Companies (ASL) up nearly 4% or 48p to £12.63. Edinburgh (EDIN) and Mercantile (MRC) added nearly 3%.

On the Small Cap index, the highly-geared Aberforth Split Level Income (ASIT) surged 6.8% or 4p to 63.1p, with Lowland Investment Company (LWI), JPMorgan Mid Cap (JMF) and Artemis Alpha (ATS) in hot pursuit with gains of over 5.5%.

Baillie Gifford UK Growth (BGUK), BlackRock Latin American (BRLA), Invesco Perpetual UK Smaller Companies (IPU) and Aurora (ARR) formed a rearguard with gains of over 4.4%.

Confirming evidence of a rotation to ‘value’-style funds, EP Global Opportunities (EPG) was one of the few global, ex-UK trusts to join the rally.

Monks (MNKS), the Baillie Gifford ‘best ideas’ trust, and Allianz Technology Trust (ATT), were more typical, both easing 0.7% after a year of strong gains.

UK real estate investment trusts also stood on the sidelines, despite having been overshadowed by years of uncertainty since the 2016 Brexit referendum. BMO Commercial Property Trust (BCPT) slipped 1.2% to 77.5p, while among the small caps, Custodian (CREI) retreated 2.4% to 87.5p and Impact Healthcare (IHR) – which has benefited as a ‘safe haven’ this year – slid 1.8% to 107.25p.

Keystone (KIT), the UK All Companies trust turning into a China Growth (BGCG) fund under Baillie Gifford, gave up 1.2%, as did JPMorgan China Growth & Income (JCGI). Ruffer (RICA), the defensive, global multi-asset investment company, eased 3p to 253p.

With reports suggesting the UK’s dominant services sector lay outside the ‘narrow’ deal, David Owen, chief European economist at Jefferies, cautioned that as always the devil would be in the detail.

‘But at least we are on the cusp of a deal finally being agreed, and we can hopefully look forward to a strong economic recovery from the second quarter of next year onwards, after the vaccines have been rolled out. But this is not the end of Brexit, far from it,’ he warned.

Where are the bargains?

After the vaccine rally of the past two months, outright bargains among investment trusts are in short supply, as our recent Trust Watch reports have highlighted.

However, in the UK Equity Income sector – which it presumably will be leaving – Value and Income (VIN) stands on a 23% discount below net asset value (NAV) as founder and leading shareholder Matthew Oakeshott prepares to turn it into a pure real estate trust to preserve the dividend hero’s high 6.5% yield. Aberdeen Standard Equity Income (ASEI) trades on an 11% discount, slightly wider than its 9.6% average of the past year and 2% average of its sector, as fund manager Thomas Moore tries to remedy its poor performance in the 12-month ultimatum the board has in effect given him.

Discounts are much wider in UK Smaller Companies trusts, with the 6% average belying deficits to NAV of up to 30% in some specialist and illiquid listed funds such as Marwyn Value Investors (MVI) and activist Crystal Amber (CRS). However, using the Z-score we rely on as a guide in Trust Watch, the only recent bargain has been Simon Knott’s Rights & Issues (RIII), whose 10% discount we have tracked for a while and seen it narrow to 8% this week. It may have come in further with a 3.6% rise in the shares today. Nick Greenwood of Miton Global Opportunities (MIGO) this week disclosed he sold it earlier in the year when its discount had previously narrowed.

Aslo in this sector, the 17% discount at Strategic Equity Capital (SEC) looks wide in light of Gresham House’s Citywire AA-rated Ken Wotton taking over in September.

In UK All Companies trusts, the recent revival of Artemis Alpha (ATS) has removed a long-standing bargain. Henderson Opportunities Trust (HOT) looked better value on a 16% discount that was only slightly narrower than its one-year average, although shares in the small James Henderson and Laura Foll portfolio have also shot up 6% today. That leaves stockpicker Max Ward’s Independent (IIT) the best of the lot, with a 12% discount wider than its one-year 9% average, according to Morningstar, and the shares off 1.8% today at 495p.

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