Keystone Investment Trust (KIT) controls assets worth around £273m yet its market value stands at a fraction off £235m. That’s a 13.9% discount, apparently the widest the trust’s gap between its share price (up 10p today at £17.45) and net asset value (NAV) has been for 10 years, according to City analysts.

A quick glance at Keystone’s performance tells you why this is. The trust has underperformed its Investment Trust UK All Companies benchmark over one, three and five year periods. Over the past 12 months its share price moved just 0.9% higher despite NAV rising 4.6%. Even so, that compares poorly versus an 11.9% gain for the benchmark.

Yet there is scope for that discount to narrow as the share price and NAV performance vastly improve, say analysts. Driving this intriguing re-rating possibility is a (fairly) new fund manager with a short but very decent track record, plus a fresh investment approach.

NEW MAN IN CHARGE

James Goldstone is the man now running the show. He’s part of the Invesco Perpetual team that runs several investment trusts, including the Edinburgh Investment Trust (EDIN), Perpetual Income and Growth Investment Trust (PLI) and Invesco Income Growth Trust (IVI).

Goldstone has been part of the Invesco Perpetual since 2012, and while his largely bottom-up, value approach has similarities with Keystone’s previous manager Mark Barnett, he places ‘greater emphasis on valuation,’ says the investment trust research team at broker Numis Securities.

Valuation is considered in absolute terms, as well as versus its sector, the market, or the stock's own history, using key metrics including free cash flow yield, return on invested capital and dividend yield.

So Keystone investors can still expect a firm emphasis on meeting company management teams to identify quality companies with strong balance sheets and visible cash flow growth. But they can now also expect stocks to be added to the portfolio that either look cheap now, or over a three year forecast earnings period.

BIG CHANGES TO INVESTMENTS

Following his appointment Goldstone has transformed the trust’s portfolio, with circa 55% of it changed in some way to reflect his value style. He has added holdings in attractively valued financials, including UK domestic banks, insurance, and real estate.

Barclays (BARC) is today the trust’s largest single holding (5.1% of funds), while Aviva (AV.) and Legal & General (LGEN) are also in the top 10.

Elsewhere, Goldstone has strong opinions about UK domestic cyclicals, believing that market pessimism has been overplayed. As a result the manager has taken what might be considered as contrarian positions in fashion retail chain Next (NXT), leisure group Hollywood Bowl (BOWL) and JD Sports (JD.), the sportswear chain. In contrast, exposure to tobacco and healthcare stocks have been cut or axed entirely.

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Issue Date: 04 Jul 2018