By ADRIAN LOWCOCK 20/05/2009
In the UK, there are over 300 investment trusts with combined assets under management of over £70 billion investing in a wide range of assets from UK equities to hedge funds and commercial property.
Investment trusts, as with other collective investment schemes, have the same aims for investors; to provide diversification and exposure to other markets at a cost effective price. However, there are several key differences between them. Firstly all investment trusts are quoted on the stock market and, like any company, have a fixed number of shares in issue. The price of an investment trust share is therefore dependent on the supply and demand for its shares and not simply the underlying investments it holds, whilst a unit trust or open-ended investment company (OEIC) is always valued with reference to its Net Asset Value (NAV).
Discount to NAV
This extra layer of demand introduces additional volatility and means that investment trusts can potentially be more risky than their unit trusts or OEIC counterparts, so there is greater potential for profit or indeed a loss. As the share price can move to a premium or discount to the NAV of the trust an investor can benefit by buying at the discount and selling as this narrows. Professional investors study the discount to NAV to identify those investment trusts which might provide an opportunity based on historic averages.
Do not get caught out
An investment trust trading on a discount significantly greater than its average can benefit from demand driving up the price of the investment trust, even if there has been no improvement in the value of its underlying assets. This apparent investment alchemy will often attract a second wave of investors who believe the trust will continue to provide enhanced returns. Sadly, this is often retail investors who are late to the party and suffer but the price of the investment declines to bring the discount back in line with its average. When the discount to NAV narrows and comes in significantly below its average then it is time to consider taking profits. We have recently seen some fund discounts narrow following the rally in equity prices since March, especially within the popular equity income sector.
Examples
We have listed below some investment trusts which are currently trading at narrow discounts to NAV. Smaller investors could take advantage of this by trading out and investing in their unit trust counterparts. The examples below are taken at a specific point in time and as the market moves both their price will change as will the NAV of the fund. Please check with your stockbroker to obtain the most current prices before determining whether to sell.
Source Winterfloods as at 18th May