3 months ago • 5 mins
The annual Black Friday/Cyber Monday sales event is upon us, as so many advertisers seem determined to tell us, with retailers offering discounts to draw in customers. But investors could potentially bag themselves a different type of bargain – one that doesn’t involve crowded shopping malls or online shopping carts. Dzmitry Lipski, head of funds research at interactive investor, recently checked out the deals and found three funds you might want on your holiday shopping list.
The stock market has seen some volatility this year, stoked by unusually high inflation, steeper interest rates, recession fears, and a rise in geopolitical tension. The economic outlook has certainly improved recently in some areas, and that’s tamped down some of that nervousness and volatility, but Lipski says he nonetheless found some good-quality investments that are available seemingly on the cheap. (Though, of course, he adds, there are no guarantees).
Right now, he says, investors could benefit from taking a more balanced approach to income shares, leaning into global stocks with moderate but rising dividends and strong balance sheets, rather than those that are already high dividend payers.
He says more adventurous investors could look beyond the usual asset classes to take advantage of more attractive income opportunities that exist across global markets. For example, emerging markets and high-yield corporate bonds, real estate, and infrastructure assets might offer higher payouts, but they also require taking on more risk. But it’s worth keeping in mind, he says, that no matter what your investment goals are, a well-diversified portfolio can help spread out your risk, reduce volatility, and give you the best possible chance of generating sustainable, expanding income over the long term.
For investors, bargain-hunting is not reserved for just a week or so of the year – particularly for those who are fans of investment trusts.
Myron Jobson, interactive investor’s senior personal finance analyst, says that, because of their structure, investment trusts can potentially offer investors the chance to pick up a bargain, but it’s not a case of simply looking at the discount in isolation. Investors should assess the trust’s “bargain credentials” by comparing its current discount with its longer-term average, like over the past 12 months, for example. If the discount is greater than the trust’s 12-month average, that signals a potentially attractive entry point.
But, he adds, it’s important to give your investment ample time, at least five years, to grow.
Baillie Gifford’s Scottish Mortgage Ord trust aims for capital appreciation by investing for the long term in best-in-class growth companies across the globe, allowing an allocation of up to 30% in unlisted assets.
Over the past decade, the popular trust has traded typically near to its net asset value (NAV), or at a small premium, until a stark deterioration in performance in late 2021 saw the discount widen through 2022, to a depth of around 22% in the first half of 2023. Despite a small recovery in the past two months, the current discount of near 14% still represents a marked divergence from the trust’s five-year premium/discount trend.
The trust clearly struggled through 2022, Lipski says. Scottish Mortgage biases strongly toward growth companies and longer duration assets. The future value of these companies is discounted back to give a current valuation, which means valuations are impacted by rising interest rates: higher interest rates mean higher discount rates and lower current valuations. The trust clearly struggled through 2022. Scottish Mortgage biases strongly toward growth companies and longer duration assets. The future value of these companies is discounted back to give a current valuation, which means valuations are impacted by rising interest rates: higher interest rates mean higher discount rates and lower current valuations.
However, Lipski says ii’s confidence in SMT’s investment strategy remains intact, as its unique and high active share approach has shown an ability to create substantial alpha and pick companies at the helm of transformative themes. The global trust offers a unique and long-term approach to investing in future winners, as well as exposure to operationally strong and growing businesses that aren’t accessible via any exchange listing.
Managed by Janus Henderson’s Ollie Beckett, The European Smaller Companies Trust PLC invests in small-cap companies across Europe. The bottom-up process seeks companies overlooked by the market with barriers to entry, differentiated business models and strong management. The portfolio is varied in allocating a small amount to early-cycle growth companies, with the balance across quality growth, mature and turnaround companies. The overall portfolio has no preeminent value or growth tilt, but a clear bias toward the bottom of the market-cap spectrum, even versus other small-cap peers.
In spite of the trust’s strong track record of outperforming peers and index over the long term, Lipski says poor market sentiment has resulted in a discount of 14.17% to the fund’s NAV, a shade below its three-year average and the deepest discount within its peer group.
Lipski notes that returns on European small-caps have lagged their large-cap counterparts through a tough 2022 and 2023. Valuations across European markets have fallen to levels below recent averages, throwing up opportunities for value-minded investors, such as ESCT, and exacerbating the perceived cheapness of the already discounted trust.
Baillie Gifford Shin Nippon Ord, managed by Praveen Kumar, seeks to grow capital over the long term via investing predominantly in disruptive and dynamic Japanese small-cap companies possessing of substantial future growth potential.
The trust is currently trading at a discount of near 13%, which, aside from a brief period in early 2020, represents the deepest discount for the trust in over a decade and the widest discount to NAV of its peer group. And that discount is far below its five-year average of around 2%.
While the trust boasts strong long-term performance and some great individual examples of stock picking, the stylistic bias toward growth has been a headwind for recent returns, and valuations across the portfolio have fallen to just over half those earnings multiples seen in late 2019. If sentiment toward portfolio companies recovers, and valuations normalize, Lipski says there could be scope for a reversal of fortunes for the trust.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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 advisor.