Market mayhem creates investment trust bargains

Share prices and share price discounts to net asset value (NAV) for Asia, emerging markets and biotechnology investment trusts have plummeted over the past month as investors flee the sectors on growth and overvaluation fears.

According to investment trust broker Stifel, a number of trusts have seen their discounts widen by more than 5% over the month to 24 August, with Asian trusts being hit the hardest in the face of sharp falls in the Chinese equity market that caused a global market sell-off on Monday 24 August.

One of the worst hit in share price terms is Money Observer Rated Fund Fidelity China Special Situations, which has seen its share price fall 24% to 112p over the past month.

However as the trust's NAV has also plummeted 27%, its share price discount has in fact narrowed to 12%, which is above its 12-month average of 13%.

Attractive levels

Asian income funds have been hardest hit by widening discounts, with Aberdeen Asian Income seeing its discount widen by more than 6%, from a small premium to 5% over the past month.

Henderson Far East Income has also de-rated from a 3% premium to a 4% discount, with a 23% fall in its share price.

Global emerging market trusts have also seen sharp falls in both their share prices and their NAVs over the past year. Genesis Emerging Markets' share price has fallen 15% in the 12 months to 24 August while its discount has widened from 8% to 13% over the past month.

Commenting on the price movements, Iain Scouller at Stifel says that, for "contrarian investors", valuations within Asian and emerging market trust sectors are now at "attractive levels".

Biotechnology slides

The biotechnology sector has also seen sharp share price and share price discount de-ratings over the past month, as investors become increasingly wary after three years of outstanding returns.

"The biotech sector has been a darling of the market over the last few years with the Nasdaq Biotech index rising in almost a straight line and by nearly 300% in the four years to 24 August.

"Markets that rise in straight lines tend to correct sharply - as we are now seeing - and no doubt there will be bargains to be had further down the line," says Scouller.

International Biotechnology and the Biotech Growth Trust have seen their share prices fall by 18% and 23% respectively in the past month to 24 August, pushing Biotech Growth's discount out beyond its 12-month average to 8.2%.

However, Scouller warns that following the outstanding performance of recent years there are still "substantial gains" within these share prices and "large profits to take", even after the recent market correction.

UK and global bargains

A number of UK and global equity-focused trusts have also seen sharp falls in their share prices over the past few weeks. These include the Woodford Patient Capital Trust, whose share price has fallen back from 120p two weeks ago to 109p on 24 August.

According to Stifel this reflects concerns about the extent of the trust's exposure to healthcare and biotechnology companies, which account for 60% of the invested portfolio, as well as the recent share issue, which has helped to erode its high premium.

The broker says there have been large falls in the NAVs of a number of global trusts, especially those with significant exposure to growth companies.

Money Observer Rated Fund Scottish Mortgage has seen a 16% fall in its NAV over the past month and a 14% slide in its share price, but Scouller says the shares still "look expensive" on an estimated 6% premium.

Fellow Money Observer Rated Fund Witan has also seen a sharp de-rating, with shares moving from trading on a 1% premium to a 3% discount over the past month.

"There appears to have been significant selling of many international funds by private investors in the last couple of weeks, and we view any further widening of discounts as an opportunity for longer-term investors," says Scouller.

Sector survivors

In contrast, Stifel says that UK smaller company trusts have "held up fairly well", as the FTSE Small Cap Index has fallen just 4.4% compared to the FTSE 100 index's 10.4% slide in the month to 24 August.

These include Money Observer Rated Funds BlackRock Smaller Companies and Henderson Smaller Companies, both of which continue to trade above their 12-month share price discount averages.

According to rival broker JPMorgan Cazenove, peer-to-peer lending, renewables, debt funds and property have also fared well recently.

"These sectors have high yields in common that will benefit from likely 'lower for longer' interest rate policy and also zero or limited direct economic exposure to emerging markets, or the cycle more generally," the firm says.

JPMorgan Cazenove adds that trusts with large cash reserves should also fare well in coming weeks. These include Money Observer Rated Funds Personal Assets (26% cash) and Pacific Assets (11%), as well as the newly launched Miton UK Microcap (21% cash).

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.