hsbc analyst paul locke says all sectors have experienced a tightening of share price discounts, led by the international generalist funds
nvestment trust share price discounts to net asset value (NAV) have narrowed to their lowest level in almost nine months.
The average weighted discount in the investment trust sector, excluding venture capital giant 3i plc, has been pared back to its tightest level since the end of August 2002, according to HSBC analyst Paul Locke.
Locke said improving sentiment on equities has driven the sector upturn, led by a marked narrowing of discounts among many of the International Generalist funds, where the weighted average discount fell to 9.8% last week, down by four percentage points since the end of March.
The weighted discount on the UK Smaller Companies sector narrowed to 14.7% as of 16 May, its lowest level since the end of 2002 and down from a weighted discount of almost 18% just a month earlier.
'All sectors have witnessed contraction in discounts over the last month, with even higher risk spheres such as technology and biotech/pharma undergoing a notable tightening as markets, trusts and underlying stocks were at least partially, and perhaps temporarily, re-rated,' he said.
Locke said the narrower discounts do not mean a lack of value within investment trusts or in specific trust sectors.
'Relatively large trusts in the International Generalist sector such as Alliance Trust, Second Alliance and Foreign & Colonial have had a disproportionate impact on the weighted sector discount,' he said.
Close Wins head of research Charles Cade said recent mergers and reconstructions among trusts has boosted interest in the asset class. 'There has been a lot of corporate activity and investors have become less risk-averse.
'They had previously been avoiding any of the specialist asset classes such as smaller companies. Europe has also had a good run, obviously assisted by the effect of the euro's appreciation,' he said.
'Areas that were offering particularly good value have now come in quite a lot.
'European Small Caps and Emerging Markets were on discounts of 20% and more, and they have now narrowed in by four percentage points.'
Demand for Far East sector trusts had also improved as investors are beginning to downgrade fears over the impact of the Sars virus.
Locke agreed underlying sentiment remains as potentially fragile as the economies to which the trusts are linked.
'As a result, switching into those less expensive vehicles should certainly be considered at these levels,' he said.
Most other sectors appeared relatively expensive against their 12-month average discounts, although this is primarily due to the extreme width of discounts over the last 12 months rather than there being any inherent lack of value, Locke added.
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