What does the chart show?
 
This chart shows the discounts of specialist or alternative asset (Association of Investment Companies property, private equity, and infrastructure) investment trusts’ share price to their Net Asset Value (NAV) since 2015. NAV represents the total underlying value of all fund assets per share. Investors gain exposure to these assets by purchasing shares of these investment trusts traded on the stock market, leaving the share price susceptible to the same supply and demand dynamics as traditional stocks, resulting in prices fluctuating either above (premium) or below (discount) the NAV. In the chart we can see investment trusts’ average discounts in specialist assets have widened to their highest levels not seen since the onset of the COVID-19 pandemic, suggesting weak market appetite. 

Why is this important?

Against a backdrop of economic uncertainty and rising interest rates, alternative assets like property, infrastructure, and private equity have performed poorly due to their sensitivity to higher rates. As alternatives are often considered risky investments, higher rates have caused investors to rotate into “safer” assets such as government bonds which now offer attractive yields. The key question for investors now is whether these significant discounts offer interesting valuation opportunities, especially given interest rates are approaching peak levels. While share prices tend to be volatile in the short-term, sometimes creating deep discounts, these have historically corrected themselves over time. However, dangers also arise where investors believe that managers are being overly optimistic when calculating their NAV and discounts then become embedded in investor expectations, leaving room for these to widen further. Long-term investors can reap benefits from riding out temporary volatility, waiting for the economic outlook and consumer sentiment to improve. Due to their inflation-linkage and low correlation with equity markets, asset classes such as property and infrastructure could also provide protection for investors if inflation does not return to low target levels.  As always, investors should not purely rely on discounts as a guarantee of capital returns; they should also ensure that the underlying holdings in the trusts they invest in are of high quality. Given expectations of increased market turbulence, alternatives continue to offer diversification benefits at attractive valuations. Discounted NAVs in private equity continue to appear overly pessimistic, while secular trends in infrastructure support our outlook for both asset classes.