Vanguard Emerging Markets or Small Cap

TCA

DoctorW wrote: »

On the BestInvest platform (where I currently have my SIPP) the factsheet for the fund doesn't show any details regarding the discount. Assuming this doesn't mean the discount is not there and that it is applicable to anyone buying into the fund from any platform while the discount is still active?

I also use BestInvest, which only shows prices. As the discount/premium is a function of both NAV and price, they don't show it. I suppose it's one less thing for them to update.

As JohnRo pointed out, Morningstar is useful for a quick look at discounts. I use it for quick reference but the only downside for me, is that it's not updated that quickly. A trust like Aberforth reports NAV's daily and as I type Morningstar is showing the last actual NAV from 28th August, along with a current estimate.

I don't know how they calculate their estimate but you can go to the LSE website, get the latest actual NAV from there (under latest news), and calculate the discount/premium for yourself based on a real-time share price. Not perfect but as good as you'd get I think:

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB0000066554GBGBXSTMM&lang=en

DoctorW

Just logged onto my HL ISA account which gives the up-to-date discount of 6.99% with a 12m average discount of 8.19%. Also shows the historical discount level.

There are a number of things that confuse me about this fund and the discounts over the past few years. Why would a fund that is performing well, consistently have a discount? I realise the last 6 months haven't been great for this particular fund but the discount was even higher 2-3 years ago when the returns were pretty strong?

Seems like I can pretty much discount the current discount if it's currently less of a discount than both its 12m average discount as well as the longer average discounts? Of course this is no reason to pass over the fund if it still matches with my intended risk/time horizon but it certainly confuses a newcomer to this world a bit!

Thanks again

D

DoctorW

DoctorW wrote: »

Seems like I can pretty much discount the current discount if it's currently less of a discount than both its 12m average discount as well as the longer average discounts?

terrible sentence by the way, haha. Apologies.

bowlhead99

DoctorW wrote: »

Just logged onto my HL ISA account which gives the up-to-date discount of 6.99% with a 12m average discount of 8.19%. Also shows the historical discount level.

Seems like I can pretty much discount the current discount if it's currently less of a discount than both its 12m average discount as well as the longer average discounts? Of course this is no reason to pass over the fund if it still matches with my intended risk/time horizon but it certainly confuses a newcomer to this world a bit!

Thanks for the confusing language but I know what you're getting at

You are partly right that if something seems to have a permanent discount (i.e. price to assets) then you can almost discount (i.e. disregard) the discount (the price to assets ratio) because the discount (the price to assets thing) might well still be there, or even greater when you eventually come to exit it again.

Obviously it's great if you can make some 'free money' on the discount. If the assets went up from 100 to 105 while the discount/premium went from -10% to +10%: you'd make 28% (115.5 from 90) on only a 5% underlying return! It's not usually that extreme, but as a random anecdote (as I had it to hand from an old post of mine on this site), I had an investment in SST which went from a 6.3% discount in Aug '12 to a 2.7% premium in March '13 - delivering me a 44% return on 'only' a 31% NAV change.

However, buying at a discount can still have inherent value. Even small companies can produce dividends, and if £100 of assets are on sale for £93 as they are with that trust you mentioned today, you still get the dividend stream of £1 or £3 or whatever per year, after management fees, but you're getting it on a £93 cost instead of a £100 cost that you'd have to pay for the underlying assets. So, it's not a bad thing to be buying and selling at a semi-permanent discount.

There are a number of things that confuse me about this fund and the discounts over the past few years. Why would a fund that is performing well, consistently have a discount? I realise the last 6 months haven't been great for this particular fund but the discount was even higher 2-3 years ago when the returns were pretty strong?

You need to put this into a long term historical context and also consider what people think of the fund manager and the sector in general.

The Aberforth smaller co trust, and also their UK smallcap fund, have been good performers over the last 1,2,3 years. Not absolute top of the table and you can see they've fallen with other UK smallcaps but certainly top quartile or maybe higher second quartile within their sector. Agreed with that.

But you say the discount was high even 2-3 years ago when the performance was great - why would that be? Well, actually the performance within their sector wasn't so great back then, and anyway markets certainly have a long memory. Let's look at a chart of April 2007 to Sept 2012:



We can see that Aberforth's IT and their mainstream fund in the same sector had done worse since the start of the credit crunch thatn the IMA sector average. The IT had a max loss of 60% to the end of '08, while the ungeared fund and the sector average was 50% or less. It basically made up the difference by the time everything bottomed out in March/April 09 year, but then six months later it started to fall substantially behind the sector average again that by June 11, the IT and the fund were overall flat since mid 2007 - while the IMA average was +10% and some of the top trusts not plotted here would have been well ahead of the average.

Then in the 3rd quarter of 2011 the market tanked again and the IT tanked further. By the start of the following summer it had caught up again and order was restored with the IT at 0 and the IMA average at +10% again. So, if you were a prospective buyer rating this trust in 2012 you would think this is a risky trust that always falls further than the sector average and it is a risky sector with the UK economy far from being out of recession. I am going to price that on a discount. And it was, as you saw in your own research, priced at a discount percentage greater than it is today.

We could look at how the fortunes have changed since then by extending the graph. Different colours now (IMA funds sector average is now purple instead of red, you can blame trustnet.com for that):


So what has happened now is that the Aberforth fund and trust have caught up with the sector average by outperforming them in the short term, and the trust has actually overtaken and gone on further before the sector started to plateau.

But all this means is that the trust which we already know can lose 60% in the bad times can outperform the others in the good times. So it's not a badly managed trust per se, but it is riskier. In the good/great times we would expect its discount to narrow. But the rampant growth of almost 100% since the start of 2013 (or since mid 2007, depending on how you view it), can't continue unchecked forever.

Smallcap funds have run out of steam somewhat and despite already dropping back a bit already this year, many commentators consider them to still be more overvalued than largecaps or some foreign funds. If there is a largescale correction, smallcaps generally would participate in it bigtime and on past performance you would expect that Aberforth definitely would too, and maybe more than most. So, despite some awesome returns in recent memory, it is not unreasonable that a fund like this could still be priced at less than the sum of its parts.

If you hold JD Sports or First Group or Flybe directly, and you want to exit, you can just dump them in a heartbeat, even if you own all of them. As a dedicated smallcap fund, Aberforth can't dump them all and buy into defensive largecaps or go 90% cash. So it will still have those assets, or similar ones, which might be suffering very poor fortunes, and there will be no demand for the fund, so one might expect its bid and offer price will drop significantly as a proportion of the 'true', declining, asset values.

This is not a recommendation for or against you buying Aberforth. I don't own it and only looked at it for a bit of fun. There may be a whole host of reasons driving the discount or premium. Maybe key management is going to retire or new blood be introduced. Maybe they're going to change the management fees. Maybe the markets are irrational. Who knows. But maybe the above gives some colour to why something that doesn't make sense to you, might make perfect sense.

On the 'markets being irrational' thing, remember markets can remain irrational far longer than you can stay solvent, so as a general rule please don't pile into a specialist fund dedicated to a tiny segment of the world market (i.e. UK smallcap) which has 'had a good run' just to attempt to 'balance' a reasonably globally diversified largecap fund. But like I say, this is not a recommendation either way.

Enjoy your research

DoctorW

Well Bowlhead got to say that's a fantastically comprehensive reply and it's very much appreciated. Put it all into context and explained perfectly.

Will continue my research anyhow. Feel like running back to my low-cost passive tracking bunker already!

Again, thanks a lot for putting the effort in to reply in that way.

D

TCA

bowlhead99 wrote: »

The Aberforth smaller co trust, and also their UK smallcap fund, have been good performers over the last 1,2,3 years.

Smallcap funds have run out of steam somewhat and despite already dropping back a bit already this year, many commentators consider them to still be more overvalued than largecaps or some foreign funds. If there is a largescale correction, smallcaps generally would participate in it bigtime and on past performance you would expect that Aberforth definitely would too, and maybe more than most. So, despite some awesome returns in recent memory, it is not unreasonable that a fund like this could still be priced at less than the sum of its parts.

I'm currently looking at Aberforth (ASL), Standard Life UK Smaller Companies (SLS) and BlackRock Smaller Companies (BRSC). All three have more or less given up their gains from the past year and using the latest NAVs are close to or have surpassed their highest discounts for the last 12 months.

Using close of business prices from today and NAVs from yesterday, I calculate the following discounts:

ASL - 12.62%
SLS - 7.53%
BRSC - 16.13%

All mighty tempting but looking at their graphs you can see superb growth from the start of 2012 until this latest slide, so there's a long way still to fall if the recent decline continues.

I'm watching with interest.