There is much to consider when it comes to investing in funds: their investment strategy, assets under management, past performance, management fees, and profile of the fund manager.
But with investment trusts, there’s another important factor to consider: the discount or premium to its net asset value (or NAV). This is because as investment trusts are closed-end funds with a fixed number of shares in issue, the share prices can trade at a premium or discount to the value of its underlying investments, its NAV. No new shares are usually issued when more people want to invest, meaning their share prices can rise and fall depending on demand and supply.
This gives investors the opportunity to pick up shares in a trust for significantly less than the sum of its parts. And with this in mind, I’m taking a look at two high-yielding funds trading at big discounts.
Diversified strategy
First up is the Tetragon Financial Group (LSE: TFG). Its objective is to generate distributable income and capital growth by investing in a diversified portfolio of assets, which includes bank loans, real estate, equities, credit, convertible bonds and infrastructure assets. (It also owns a stake in TFG Asset Management, an alternative asset management business.)
This diversified strategy is designed to generate stable returns regardless of the underlying market condition, meaning it should be less volatile across various credit, equity, interest rate, inflation and real estate cycles. It’s a flexible strategy which suits the investment company structure well as the fund can invest for the long-term without having to worry about redemptions and the need to sell illiquid assets when there are few or no buyers in the market.
For those looking for a more cautious long-term income play, the fund has proven itself a strong choice. Since inception just over 10 years ago, it has delivered an annualised total return of 11.2%. Dividends per share have grown by a compound annual growth rate (CAGR) of 6% over the past five years, and shares in the trust currently yield 5.4%. What’s more, with the shares trading at a discount to its NAV of 36%, prospective investors are able to buy a pound’s worth of assets for just 64p.
On the downside, the shares have historically traded at persistently wide discounts of typically more than 30%, meaning investors should not be too hopeful of a narrowing of its discount to boost returns.
Absolute returns
Another fund aiming to deliver absolute returns across the cycles is Toro Limited (LSE: TORO). It seeks to generate attractive risk-adjusted returns by investing in asset-backed securities and structured credit markets.
This isn’t suitable for all investors, but if you’re prepared for slightly bigger risks for a potentially higher return, this fund could boost your portfolio’s yield. The shares are currently trading at a 15% discount to its NAV, with a yield of 9.5%.
Toro has a management fee of 1% of NAV and a performance fee of 15% on NAV total returns, subject to a high watermark. It targets net returns of 12%-15% annually, although actual returns have historically been lower — since inception in 2015, it has delivered a total NAV return of 17%, giving an annualised performance of just 6%.
Equities
For investors seeking discounted equity income funds, I recommend taking a look at my article last week on Middlefield Canadian Income Trust and City Natural Resources High Yield Trust.
