the group identifies JP Morgan Fleming Indian and JZ equity on buy list
HSBC has put a number of investment trusts onto its list of potential buys as discounts have moved out to create attractive opportunities.
The funds include JPMorgan Fleming Indian and JZ Equity, both of which stand at wide discounts to their net asset value. In the out-of-favour European sector Charter Pan European and Fidelity European Values both offer discount value.
HSBC analyst Paul Locke said: 'While the discount on Charter Pan European has narrowed from its recent peak, we believe further tightening from these levels is appropriate. Reconstructed with an absence of its previously expensive debt, the fund has delivered relatively strong returns in recent weeks, aided by its UK exposure versus its continental European peers. Yet the fund continues to trade at a discount to the wider sector.'
'Europe may be out of favour at present, augmented by a weak Germany economy, but valuations remain attractive, with the historically robust Fidelity European Values, managed by Tim McCarron, also offering significant relative value at these levels,' he said.
Also included is Edinburgh's US Tracker trust, currently on a discount of 6.8%, but Locke said any sustained pick up in the US market will feed through to the fully-tracked structure of the fund and any sustained pick up in sentiment will naturally feed through to a tighter discount.
Turning to other opportunities, Locke said: 'On a global basis, the Bombay SENSEX Index has proved comparatively resilient this year, declining by a relatively shallow 8.4% year to date. Despite this, JPMorgan Fleming Indian continues to be priced relatively widely at a discount of 22.8%, reflecting a comparatively high degree of market risk.
'Such pricing is, of course partly natural. The Indian market remains over 25% down from its early 2001 peak, with tech-related companies, however vibrant, not immune from the ending of the bubble.'
The trust, he said, offers potential upsides for investors at this point. This has been enhanced primarily by the company's re-entry into the buyback market.
Since end-September, the trust has repurchased and cancelled 725,000 shares, representing 0.93% of shares outstanding. While this remains small in overall terms, the repurchases were the first for almost a year, raising the possibility of both NAV enhancement and greater discount support through such a programme.
On JZ Equity, Locke said: 'It is certainly not a stock for everyone in these risk-averse times, still it undoubtedly remains a favourite of HSBC and continues to be recommended as a long-term buy. Currently yielding in excess of 8% and having recently launched its $1.5bn sister 'Resolute Fund', JZ Equity stands at a marked discount of 40.8%.
'This comes despite the trust's relatively conservative valuation policies and strong prospects for a rise in the fund's yield as it slowly reconstructs its portfolio to include more mezzanine debt.'
One further discount opportunity is Fleming Emerging Markets, which Locke sees as inexplicably undervalued against its peers.
'Relative mis-pricing is not a new phenomenon in the investment trust sector,' Locke noted. However, when such mis-pricing actually contradicts fundamentals, opportunities arise. In recent days this has developed in relation to the various emerging generalist trusts, with the discount on Fleming Emerging Markets appearing the most out of sync,' he added.
'This comes despite the trust's relative performance strength over most periods versus that of its peers. Yet, somewhat perversely, and despite comfortably outperforming other comparative stocks such as Templeton Emerging and Schroder Emerging over the past 12 months, Fleming Emerging is currently being priced at a discount not just to these funds but the wider sector as a whole.'
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