This year has seen the investment companies sector shrink as boards have made big efforts to narrow discounts.

Given the sheer amount of buybacks, mergers, liquidations, managed wind-downs and the like, it is a shame that at 12 December share prices stood at a median discount of 13.9% below net asset value (NAV). That was wider than the median discount of 12.8% at the end of 2023.

As a result, despite positive investment returns overall, the market capitalisation of the sector has fallen from £178.9bn to about £174.3bn, and the number of listed funds has reduced to 299 from 326.

It would be easy to get disheartened, but my gut says that the Budget-related sell-off marked a low point for the sector and that investors will take a more rational look at the value on offer as we go into 2025.

In share price performance terms, some clear winners and losers stand out. Regional Reit’s (RGL ) scramble to shore up its balance sheet puts it close to the bottom of the league tables. However, the list of losers is dominated by the renewable energy trusts, particularly the energy storage funds.

The well-documented problems in generating revenue from GB-based battery storage dealt a significant blow to these funds. As they seemed convinced that the problem was going to be temporary, I was surprised that we did not get a bid for one of them, but then Harmony Energy Income Trust (HEIT ) decided to sell off its assets anyway.

That process should conclude shortly, and it will be interesting to see how close Harmony gets to its recently written-down NAV per share of 88.5p. The discount is still around 30%, so there might be some decent upside in the shares.

However, Ecofin US Renewables (RNEW ) has just demonstrated the perils of chasing these apparent discount opportunities in wind-up situations. On Friday it announced that the net sale price for a block of solar projects that it had already written down as at 30 June had come in around a third lower than their value in its NAV, justifying the trust’s wide discount.

AI-focused Manchester & London (MNL ) and the two technology trusts – Allianz Technology (ATT ) and Polar Capital Technology (PCT ) – feature highly in the top performing shares.

Some of the aircraft leasing funds also did well as Doric Nimrod Air Two (DNA2 ) managed to sell its planes ahead of its planned wind up.

Baillie Gifford US Growth (USA ) has had a late surge, helped by the jump in US markets post the election, and expectations for a significant write up in the valuation of its largest holding, SpaceX.

Flight path

Seraphim Space (SSIT ) has been a winner too, its shares are up almost 70% this year, having recovered from trading on an excessive discount. The shares still look cheap, however, trading 38% below an NAV that has been fairly flat this year.

Like many other growth capital trusts, it sold off sharply when interest rates started to rise and investors became more wary of backing unprofitable, cash consumptive businesses.

However, the portfolio is steadily maturing, attracting more external finance, and Seraphim is projecting that five of its 10 largest positions would be profitable by the end of 2025. SpaceX is not a position in the portfolio, but its success in driving down the cost of launches has been an important factor in the growth of the space industry. The trust could have further to run in 2025.

Surprise recovery

However, at the top of the share price performance tables is another growth capital stock, Petershill Partners (PHLL ).  This large but not well known or understood investment company specialises in investing in alternative asset managers. In April 2022, I summed it up as a bet on the growth of the ‘alts’ sector.

At the time, the shares had just run up and I felt it was not the right time to buy, but perhaps worth keeping an eye on. In the event, April 2022 marked a high point for the shares in that year. Over the next 18 months or so, the shares almost halved. The 77% share price return that the company has generated over 2024 (to 12 December) merely takes it back towards April 2022’s levels.

The re-rating has been driven by share buybacks, a tender offer, and more recently, a couple of big disposals – LMR Partners and Accel-KKR – from its portfolio of stakes in asset management businesses. The headline price for these was $575m (19% more than their carrying value). These have helped fund a couple of sizeable special dividends.

Based on Morningstar’s estimated NAV figures, Petershill’s discount has narrowed significantly over 2024 and now stands at about 21%. The managers of Polar Capital Global Financials (PCFT ) are quite optimistic about prospects for alternative asset managers (it has stakes in companies such as Ares, KKR, and CVC). My guess though is that while Petershill may have further to run in 2025, it is unlikely to top the tables again.

Tempting yields

Fairly often in 2024, I have been pleasantly surprised how I have been able to buy shares in some decent quality trusts at unrealistically low prices. Increasingly, I have been locking in some of the very tempting yields on offer in the sector and I expect that this will continue to be a focus next year. 

My hope though is that the bargains will start to dry up as investors take advantage of them. Here is to a prosperous 2025.

James Carthew is head of research at QuotedData.

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