Share prices of UK investment trusts have fallen to their steepest discount to underlying asset values since the financial crisis after a bruising market sell off.

Investment trusts — close-ended funds that are publicly traded — fell an average of 22 per cent below the value of their underlying assets on March 19, compared with a typical discount of just 1.1 per cent at the start of this year.

The average share price of the trusts has fallen 16 per cent over the past seven trading days, while the FTSE All Share fell 7 per cent.

“It’s a difficult marketplace and that’s when the investment trust sector starts performing very differently from the wider market,” said Simon Elliott, an analyst at Winterflood. 

Investment trusts were performing in line with the market during the beginning of March.

But on March 13, the discounts between the share price of the trusts and the value of their underlying investments “started widening considerably” said Mr Elliott. “It’s been driven by retail selling. Investors decided they wanted to get out of this market.”

Line chart of Year to March 23 2020 (%) showing Investment trust sector average discount

When the value of a trust’s underlying asset becomes uncertain, discounts widen as investors speculate about drops in asset values. Unlike equities, “many of these investment companies are not shares you can value every minute of every day,” said Mr Elliott. 

Scottish Mortgage Investment Trust, the UK’s largest investment trust run by Baillie Gifford, is trading at a 13 per cent discount, which analysts said was because of heavy exposure to unquoted, and therefore difficult to value, companies.

“Investors are effectively acting ahead of the valuation,” said Ryan Hughes, head of active portfolios at AJ Bell. “The same thing happened in the financial crisis. Investors began to question what is this investment company actually worth?”

Property funds holding leisure, student accommodation and retail assets were hardest hit, as investors anticipated a big hit to the sector, according to Monica Tepes, an analyst for FinnCap. Other poor performers included trusts invested in private equity and private debt.

UK small-cap has also underperformed, and some invested trusts have lost half their value since the start of the year. The FTSE small-cap is down less, at 41 per cent over the same period. 

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Trusts invested in blue-chip UK equities have held up better and are trading close to the market value of their assets.

Investment trusts are popular with income investors because of a reputation for high dividend payments.

They hold significant cash reserves, which enable them to maintain dividend payments when underlying companies stumble. However, the scale of the dividend cuts could soon outstrip the trusts’ ability to pay out. 

“The risk is that they exhaust that reserve very quickly and it will become difficult for them to maintain or increase their dividend,” said Mr Hughes. 

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