Unit or Investment Trusts?

jimjames

I tend to buy investment trusts where I can in preference to unit trusts but only when they are at a discount.

It appeals to me effectively being able to buy £1 of assets for 90p (for example) as you are then getting the growth of the £1 of assets and the income from it rather than of the amount you actually invested. For some private equity trusts last year I was buy £1 of assets for 20p which seemed to be a complete bargain and when the market turned it made quite a tidy profit purely from the change in discount.

Obviously when a trust trades at a premium the opposite applies which is why I would avoid and by a unit trust in those circumstances.

Jake'sGran

Reaper wrote: »

Too true. Historically for no good reason anybody has been able to come up with Investment Trusts tend to trade at a discount. In other words if you liquidated them today and handed out their total assets (known as NAV) to the investors they would get back more than their shares were worth.

The discount fluctuates over time depending on the popularity of the IT, and can even become a premium (ie the share price goes higher than the total value of their assets).

Because it does fluctuate over time I am wary of ones that are trading at a premium because that could easy vanish if sentiment turns. Jake's Gran is in Fidelity China which is trading at a huge premium. A good chunk of that apparent growth is actually the premium growing rather than real growth in the underlying investments.

Reaper, when I was looking at Fidelity's site the other day I noticed they are going to take some action about what has been happening with the China SS fund. Do you know anything about this? In the press I had read that there huge demand for this IT forcing Fidelity to do whatever it is they are going to do.

jimjames

Jake'sGran wrote: »

Reaper, when I was looking at Fidelity's site the other day I noticed they are going to take some action about what has been happening with the China SS fund. Do you know anything about this? In the press I had read that there huge demand for this IT forcing Fidelity to do whatever it is they are going to do.

Fidelity are proposing to issue new shares early next year. This is likely to reduce the discount as more shares will be available. Depending how it is done it could benefit existing holders in the same way that an IT buying up its shares at a discount benefits current shareholders.

Reaper

As jimjames says they are issing more shares which ought to reduce the premium however I don't follow jimjames logic - I think it would be bad for existing holders.

When an IT buys up its own shares it boosts its value by reducing the discount. Issuing more shares should reduce its premium and I don't see how that helps existing investors. It will reduce the price.

If it were me I would give thought to switching out of the fund and moving to the respected First State Greater China fund instead (which I am an investor in) if you want to stay invested in the country. My reasoning is that the two funds have had similar performace of the underlying investments but the Fidelity one has risen higher because of the rising premium. A premium which Anthony Bolton himself says has "no logic".

If they issue more shares that will hit the premium. Furthermore Anthony Bolton won't stay fund manager forever. Remember he already retired but came out of retirement as China intrigued him. He has commited to stay with it for the first 2 years but after that all bets are off and if he announces retirement I would expect the premium to vanish almost overnight.

That is why I am suggesting locking in the outstanding gains you have made so far by switching.

This is of course just one opinion and I'm sure you will have no difficulty finding people arguing the opposite. And I am often wrong - just look at my puchases in HMV and JJB! So you will have to make your own mind up.

jimjames

I guess it depends if the shares are sold at a premium over NAV which would create a profit for the trust and then boost NAV. Depending how much the share price premium dropped then yes it might be offset so no net gain.

I believe it was suggested that it would be a rights issue so existing shareholders would get first option to buy and could then sell the rights separately if wanted.

Reaper

Ah I see what you mean. We will have to wait to find out what the plan is.

jimjames

Just received the Interim report today for Fidelity China Special situations. It appears that they have already issued nearly 30 million extra shares (initial sale was of 460 million shares, they are now at 489,700,000 as a result of selling more)

I assume from this that the authority to issue more shares has now been reached and the number they want to now issue is substantially more than this.