Investment Trusts Trading at Over 50% Discount to their NAV

What are Investment Trusts?

An investment trust is a form of investment fund found mostly in the United Kingdom and Japan. Investment trusts are constituted as public limited companies and are therefore closed ended since the fund managers cannot redeem or create shares. Source: Wikipedia

Essentially it trades like a normal company on the stock exchange, but it is really an investment fund.

What is Net Asset Value?

The Net Asset Value (NAV) is the value of an investment found by adding the total value of the fund’s assets and subtracting its liabilities.

THE NAV is the value of the assets held by an investment trust. An example would be if the Investment Trust holds £100 million in assets and has 50 million shares then each share is worth £2 per share, or 200p. This is the NAV per share. So you would expect the shares of an Investment Trust to trade at approximately the NAV, but this isn’t usually the case.

How can an Investment Trust trade under Net Asset value?

Because the trust trades like a stock, this means that it’s share price can vary in an unrelated way to it’s NAV. If an Investment Trust is popular it can trade above it’s NAV. This is called trading at a premium.  A less popular trust might trade below it’s NAV and be trading at a discount.

We have written more on Investment trusts here.

How to find an IT trading at a discount to NAV?

Luckily there are websites which specialise in this. In the UK we have a site called Trustnet.

On this site a search under ‘price and performance’ gives us a table of investment trusts. We can then sort by the Prem/Disc column.

Below is a screenshot of some of the recent ITs sorted by discount.

As we can see there are several trading at well below 50% of their NAV.

When doing research it’s also a really good idea to compare the discount to the average discount. Some Investment trusts trade at a discount for a long time. Some people believe that that is essential to calculating whether it’s an actual bargain. Therefore, an IT trading above it’s average is more likely to revert and fall to it’s average.

This information can also be found on Trustnet, if you visit the fund page and then the performance tab. You can then see a graph of the historical premium/discount.

Buying stocks which have fallen in value requires research. This certainly doesn’t represent financial advice and your own research must be done.

It’s really important to try to understand why the discount is happening.

Warnings

Something that I have found in my research over the years is to be wary of Investment trusts with a high level of gearing. Gearing is basically debt taken on to buy more assets. On Trustnet you can see the net gearing % figure under the ratings tab. Gearing can be a good thing, because you borrow money cheaply to put into higher yielding investments, but it also comes with risk. I personally rarely buy into trusts with a gearing of over 10%.

Spreads can also be a problem. This is when the difference between the buy and sell price is large.

Finally it’s also really important to cross check the discount/premium. You can generally find this on the platform you are going to buy this IT through.

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