When an investment trust trades at a discount to its net asset value (NAV), investors can effectively purchase the fund’s assets for less than the sum of its parts. Although some trusts deserve to trade at a discount, for reasons such as poor management, historical underperformance or excessive fees — buying a discounted one could be a contrarian value investment that could lead to superior returns over the long term.
That’s because an investor who has purchased at a discount has more money working for them than they had initially put in by themselves. This, in addition to a potential narrowing of the discount in the future, could drive faster growth in the value invested in comparison to the performance of its benchmark index.
Of course, there’s no certainty that the discount will narrow in the future. In addition, an underperforming fund may continue to do so, leading to potentially even bigger losses for you. This is why it’s important to assess the fundamentals to find the trusts which are most likely to outperform in the future.
With this in mind, I’m taking a look at two which are currently trading at more than a 20% discount to their NAVs.
Special Situations
First up is the Hansa Trust (LSE: HAN), a special situations fund which invests in a wide range of quoted and unquoted companies. It aspires to generate attractive long-term returns by seeking out undervalued investments.
Following a strategy review in 2014, the fund has transitioned from what was primarily a UK-focused portfolio to a much more globally diversified one. Although this has driven an improvement in returns in recent years, investors remain sceptical of its approach.
The fund owns a strategic stake in Ocean Wilsons Holdings Limited, which currently accounts for 30% of its total assets. Ocean Wilsons is an investment company itself, which owns an international portfolio that includes a controlling interest in Wilsons Sons, Brazil’s largest port and logistics company.
This strategic stake underpins the uniqueness of the fund’s investment strategy. However, in recent years, the investment in Ocean Wilsons has been a drag on returns. As such, without a recovery in Ocean Wilsons’ performance, I expect the trust’s shares will continue to trade at a discount to NAV for quite some time.
Private equity
Next is the HarbourVest Global Private Equity Limited (LSE: HVPE). The company invests in a wide range of private equity funds which, in turn, give it exposure to a broad-ranging portfolio of private equity investments diversified by geography, stage of investment and industry.
As such the HarbourVest gives retail investors exposure to a market which the general public does not normally have access to. This gives ordinary investors the opportunity to buy into unquoted companies that are in the developing stage or have under-tapped potential.
On the downside, private equity investment trusts have often historically traded at a discount to their NAVs due to the difficulty in valuing their underlying investments and illiquid nature of their assets.
Additionally, the trust uses a fund of funds approach, which has been criticised for its high cost structure. Such funds are expensive due to the double layering of fees — although on the upside, they can lower risk by spreading investments across a wider range of funds and companies.
