Bargain hunter: A small-cap star going cheap

One of the top-performing small company trusts over the past decade is on offer to investors at a knock-down price of 8%.

Standard Life UK Smaller Companies, managed by star fund manager Harry Nimmo, is trading on a "reasonably wide discount" by historical standards, notes broker Winterflood. Indeed, the current discount is wider than the one-year average of 5%.

On the surface, the discount does not look a screaming 'buy', particularly when other trusts in the sector are trading on much bigger discount. For example, BlackRock Smaller Companies and Montanaro UK Smaller Companies are both trading on just shy of a 20% discount.

Discount control

But the attraction, according to Winterflood, is down to the fact that the trust's board has in the past taken action to keep a lid on the discount exceeding 8%, through buying its own shares. The discount is therefore unlikely to widen much further.

Innes Urquhart, analyst at Winterflood, says: "The trust has typically traded at a premium to its UK smaller companies sector peers, reflecting both its strong performance record and the fact that it is one of very few funds in the peer group to operate a formal discount control mechanism.

"The board aims to limit the discount to no wider than 8% in normal market conditions through the use of share buybacks and regular tender offers and, while the latter has rarely been required, this discount control mechanism has done an effective job of limiting discount volatility."

The more domestically focused shares that Standard Life UK Smaller Companies predominately invests in were the biggest losers in the first couple of trading sessions following last month's Brexit vote.

Atttractive discounts remain

But over the past couple of weeks, shares listed outside the big blue-chip FTSE 100 index have been quietly staging a recovery on the back of investor sentiment improving. This has partly been driven by companies so far reporting that it has been business as usual since the Brexit vote.

But even though sentiment has improved, attractive discounts in the investment trust universe remain, with a number of trusts that specialise in the mid and small-cap space catching the eye.

One such trust, highlighted last week, is Henderson Opportunities Trust. On 28 July the trust was trading on a discount of 20%, but this has since narrowed to 15.6%.

Over 10 years Standard Life UK Smaller Companies is up 300%, almost double the Association of Investment Companies sector average return of 156%.

Nimmo aims to buy "tomorrow's winners", so he looks to back businesses at an early stage. Over the years he has backed a number of initial public offerings. Current top holdings include Cranswick, the sausage maker, Ted Baker and JD Sports.

How we find invesment trust bargains

Each month Money Observer will be highlighting a couple of investment trust bargains, both online and in our monthly magazine.

We will also occasionally draw attention to investment trusts that are "too hot to handle" - those that are trading on big premiums.

Our ideas come from regular conversations with investment trust analysts, and we will try to provide a mixture of bargains, from "hidden gem" trusts with less than £200 million in assets to the more established names that typically trade on a smaller discount or premium.

For the sake of simplicity, rather than using technical measures such as the "Z score", in this column we will identify bargains by comparing current discounts with their 12-month averages.

Only those trusts with a wider discount than their average are considered. We will also look at the overall sector and the quality of the trust, and then take a view on whether the discount looks a good opportunity.

This article was originally published by our sister magazineMoney Observer here.

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