UK Edition
Questor: Schroder Asia Pacific has made gains but we haven’t been able to play the discount
Questor investment trust bargain: we were hoping that the emergence of a premium would allow us to make a profitable swap to its open-ended ‘twin’
“Playing the discount” is a technique that enables very active savers to extract a little extra profit from their investment trust holdings.
You can use it when a trust exists side by side with a similar “open-ended” fund. The latter will give investors access to broadly the same underlying investments as the trust, with the key advantage that those investments can always be bought and sold at net asset value.
Hence, if the share price of the trust you want to invest in is more than the net asset value, you simply buy the open-ended fund and avoid the premium.
Similarly, if a trust you already own is at a premium and there is a similar open-ended fund available, you can sell the trust and invest the proceeds in the fund, getting more of the underlying assets in the process.
We discussed this idea in May 2017 in relation to the Schroder Asia Pacific trust when it was trading at a discount of 11.5pc. Because of this we advised readers to invest in the fund but be prepared to switch to the similar Schroder Asian Alpha Plus open-ended fund should the discount disappear.
Our advice was half successful. Certainly readers who followed it have made gains: the shares have appreciated by 15.8pc, with a 2pc yield on top. But the discount has remained stubbornly in place, so the chance to swap advantageously to the fund has not arisen. Today the discount is little changed at 10.8pc.
There is no reason to alter course now. The trust and the open-ended fund are still managed by Matthew Dobbs, who has 30 years’ experience of investing in Asian markets.
While not identical, the two funds are exposed to a greater or lesser degree to the same markets and share similar top holdings. Hold, but keep an eye on the discount and be prepared to switch.
Questor says: hold
Ticker: SDP
Share price at close: 459p
Update: Baillie Gifford UK Growth
Another trust we tipped partly because of hopes that the discount would narrow or disappear is Baillie Gifford UK Growth. Here, it was the mechanics of its change of management group from Schroders to Baillie Gifford in late 2018 that had given rise to what we hoped would be a temporary discount.
Again, things have gone well, but not quite as we expected.
The shares have gained 22.1pc in little more than a year, but the discount has only shrunk from 10pc to 6.3pc rather than disappearing.
- Sign up to our new City Intelligence newsletter for incisive comment on the day's biggest business stories
- Sign up to the Telegraph's Questor WhatsApp group for daily alerts and exclusive audio updates
- Read Questor’s rules of investment before you follow our tips
At the time of our tip UK Growth was the only Baillie Gifford trust to be trading at a meaningful discount – the firm has a very strong following among trust enthusiasts, partly because it also manages the popular Scottish Mortgage portfolio – so we had high hopes that demand would push it to a premium once it came under its new management.
Again, we will hold on to the trust despite the persistence of the discount. Baillie Gifford has a much admired philosophy of seeking that very select group of businesses that can grow profitably and sustainably, often thanks to disruptive technology.
While this approach can be riskier, we certainly think it deserves to be represented in investors’ portfolios.
Questor says: hold
Ticker: BGUK
Share price at close: 199p
Investment trust news
The board of Invesco Income Growth has decided to give shareholders the chance to wind the trust up in a “continuation vote” at its annual meeting in September.
“The directors believe that shareholders wish the company to continue but, in view of the persistently wide discount level, the board has determined that it is appropriate to give the shareholders the opportunity to confirm their support for the company’s continuation,” the trust said in a stock exchange announcement. The discount is currently 10.7pc.
The trust is part of Questor’s Income Portfolio so we will look at its future in more detail under that heading shortly.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.