Investment Trusts - Discounts and Premiums
Investment Trusts – Discounts and Premiums
We are big fans of using Investment Trusts and the main reason for this is that they are structured in such a way that allows the managers to adopt a long term approach and at the same time can create opportunities for investors.
Investment Trusts are Closed Ended Funds that are listed on the Stock Exchange; unlike a Unit Trust that is Open Ended the managers of Investments Trusts do not have to sell assets to create cash when investors ask for their money back. The shares in Investment Trusts are bought and sold in the Stock Market with brokers matching buyers and sellers together in the same way as shares in a Company are traded. This means that the Manager of the Investment Trust does not need to sell the assets that the Trust owns to meet redemptions allowing long term themes to be maintained and assets to grow in a way that is not dictated by current sentiment or short-term trends.
As a result of this structure the Trust has two important values, the share price and the net asset value (NAV); the share price is listed on the Stock Exchange and the price it would cost you to buy a share in the Trust and the NAV is the value of the Trust assets divided by the shares in issue – here’s an example.
- A Trust has 1 million shares in issue and the share price is £10 so the total value of the Trust is £10 million
- The Trust has £12 million of assets so the net asset value is £12 million divided by 1 million shares which equals £12 a share.
In this example the Investment Trust is trading at a discount to its net asset value i.e. you can buy the shares for £10 but each is backed by £12 of assets; this is a discount of 17%. Conversely if the share price was worth more than the net asset value the Investment Trust would be trading at a premium.
Sentiment often drives the share price of an Investment Trust as Managers or Sectors fall out of favour; however, the assets that they hold may be performing well or likely to perform in the future resulting in above average discounts and an opportunity that we can take advantage of.