when to buy into an investment trust?

12tonelizzie

when to buy into an investment trust?

Ark_Welder

12tonelizzie wrote: »

If I understand right, it's better to buy into an IT at a discount than a premium.

Can someone help me to interpret the discount/premium graphs on Trustnet? City of London's graph is at the time of writing at 2.0, while Edinburgh's is -3.0. Does that mean City is at a premium and Edinburgh is at a discount?

Correct

12tonelizzie wrote: »

Other things being equal (and obviously one would research other things, and they won't be exactly equal), does that make Edinburgh more attractive right now?

Thanks

Arkward word, 'attractive'! Purely from the discount point of view, Edinburgh might be better value for your money just now. But it is perhaps the 'unequal things' that might determine whether it is more attractive.

The whole sector is at a narrow discount or slight premium (Value & Income Trust is a special case), so the fact that one is at a small premium and the other a small discount might reflect investors' performance expectations.

The management of Edinburgh changed in 2008: before then it was with Fidelity, and it was moved from them due to underperformance. But, you would know this due to having read the annual reports..!

Loughton_Monkey

12tonelizzie wrote: »

If I understand right, it's better to buy into an IT at a discount than a premium.

That would appear logical. However, I have never seen any research that proves this to be a fact.

12tonelizzie wrote: »

Can someone help me to interpret the discount/premium graphs on Trustnet? City of London's graph is at the time of writing at 2.0, while Edinburgh's is -3.0. Does that mean City is at a premium and Edinburgh is at a discount?

Yes. Trustnet show a negative figure to mean a discount to NAV.

12tonelizzie wrote: »

Other things being equal (and obviously one would research other things, and they won't be exactly equal), does that make Edinburgh more attractive right now?

I'm afraid other things are never equal, and you should assume that each IT is priced 'appropriately'. Institutional Investors will probably do very substantial 'due diligence' and be prepared to pay a premium for a good reason. Perhaps the fund is weighted extremely lightly in known problem areas. Or maybe the manager has recently changed and it is expected to perform even better.....

It is basically - at its roots - no different from looking at two single shares. Manufacturer A and Manufacturer B. You can sit down with their most detailed accounts, then take your own clipboard round and do your own valuation on the company's buildings, vehicles, plant, machinery, and then inspect their order books, and interview their creditors.......

Just because you value A as 50 pence a share (but it's trading at 38 pence), it doesn't necessarily make it a better investment than B where you have valued it at £1.20 a share when it's trading at £1.89

Of course, an IT is basically a bag of separate instruments - all of which do have a 'market' value, but my understanding is that valuation of assets is not as frequent, nor as rigorous as that of managed funds, and presumably presents some inaccuracies or approximations when it comes to leveraging and foreign shares/exchange rates etc.

Remember that an OEIC fund manager is 'interested' in his values, not least for bonus, kudos, and marketing reasons. On the other hand, an IT fund manager has already sold all his shares. I'm not saying he doesn't want values to go up, but he has less direct interest in them doing so. [Incidentally, a culture I have seen first hand in Banks where fund managers in charge of, say, an Insurance fund feel themselves so distantly remote from the end 'customer' that they tend to look on it as an administrative job and any degree of 'poor performance' can simply be obfuscated by blaming it on 'cost of insurance' or something else.]

Ark_Welder

Loughton_Monkey wrote: »

Institutional Investors will probably do very substantial 'due diligence' and be prepared to pay a premium for a good reason.

Only for more specialist funds. Generalist funds are of less interest to institutional investors

Loughton_Monkey wrote: »

Of course, an IT is basically a bag of separate instruments - all of which do have a 'market' value, but my understanding is that valuation of assets is not as frequent, nor as rigorous as that of managed funds, and presumably presents some inaccuracies or approximations when it comes to leveraging and foreign shares/exchange rates etc.

Many investment trusts release NAV on a daily basis. More specialist, e.g. Private Equity, may be less frequent.

Your understanding of how NAV is calculated and reported is deficient.

Loughton_Monkey wrote: »

On the other hand, an IT fund manager has already sold all his shares.

Eh?

Loughton_Monkey wrote: »

I'm not saying he doesn't want values to go up, but he has less direct interest in them doing so.

Apart from the same reasons as an OEIC manager, plus the fact that directors of the investment trusts frequently have shares in the company and will dismiss the management company if they underperform - won't [edit] do much for kudos, marketing, nor indeed, fees.

barak

Loughton_Monkey wrote: »

.....Of course, an IT is basically a bag of separate instruments - all of which do have a 'market' value, but my understanding is that valuation of assets is not as frequent, nor as rigorous as that of managed funds.....

As I see Ark Welder has now posted, most Investment Trusts do publish "unaudited" Net Asset Values every day "in accordance with the AIC formula".

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=10918356

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=10918486

I don't understand why you think that IT managers are less interested in their performance than UT/OEIC managers. The advantage they do have is that unlike UT/OEIC managers, they don't have to buy or sell shares just because investors are buying or selling their fund and so can concentrate on their investment strategy.

Linton

12tonelizzie wrote: »

If I understand right, it's better to buy into an IT at a discount than a premium.

.......
Other things being equal (and obviously one would research other things, and they won't be exactly equal), does that make Edinburgh more attractive right now?

If you have decided to buy a specific IT then to buy it at a time when it's at a discount would be better than when it is at a premium.

BUT I think it a bad idea to buy an IT purely because it is at a discount. There may be very good reasons for the market to believe it is not a good investment.

The order of decision should be:

1) Decide what you want to achieve from an investment
2) Chose a sector that is likely to give you that
3) Chose an investment in that sector taking into account a range of factors.

Reaper

12tonelizzie wrote: »

If I understand right, it's better to buy into an IT at a discount than a premium.

Yes and no. A discount is certainly apealing but what is represents is the unpopularity of the fund, normally due to poor past performance.

While I like discounts I would also like a reason why I think things are about to change. If you just look for the IT with the largest discount you might just be buying a poorly managed fund investing in a declining sector.

blinko

I think its a bit of a red herring, if you like a sector and the fund is performing well then all the disc really reveales is that its overbought/sold

jimjames

Reaper wrote: »

Yes and no. A discount is certainly apealing but what is represents is the unpopularity of the fund, normally due to poor past performance.

While I like discounts I would also like a reason why I think things are about to change. If you just look for the IT with the largest discount you might just be buying a poorly managed fund investing in a declining sector.

I am very wary about buying an investment trust at a premium unless there is a very good reason as you make a loss if or when it does revert to discount which most trusts tend to do long term.

A prime example is Fidelity China Special Situations. When first launched it traded at a substantial premium, they then issued more shares and the premium has dropped so that it is now at a small discount. Much of the poor performance has been from the premium disappearing as well as the underlying assets dropping in value.

The premium/discount can often represent the popularity of the sector as much as the trust itself so when a sector that was popular becomes out of favour you then suffer from the discount widening or premium going. An example of this is private equity. Trusts that were trading on discounts of around 10% dropped to over 50% discount as they were sold off. For a contrarian play this would have been a good time to buy.

Jegersmart

To keep things simple - regardless of which instrument, vehicle or commodity you want to take a long or short position in it is timing that is most important (and risk management ofc). It doesn't matter whether a Vodafone share is 100p or 140p as long as the price moves in the correct direction for you. The problem I see here is that someone is trying to overanalyse the situation and approaching this from a trading perspective i an investor's context. Very confusing. If we talk about "funds" - whether they be a UT, IT, OEIC or whatever they provide a vehicle for us to gain some exposure to a certain market area(s) and instrument(s) and it is finding the right one for you at the right time (ias far as possible) that is important. Waiting for the right time based on whether there is a premium or discount to NAV is crazy, as it is crazy to rely on this when buying individual shares etc. The problem with funds is that we cannot apply technical analysis in the same way as with individual shares so in my view we have to keep it simple. If an IT offers the right mix of focus and risk for a longer term play then don't worry about what the NAV is - because the reasons for the investment outweighs any short term volatility. Or you can put a phased buy so that if the price falls you avergae down but you would miss out on price rises in the same way. My suggestion: keep it simple.

Hope that helps.

J

atush

I am finding this facintating to read.

I am big on ITs, but have NEVER bought one at a premium. Ever.

I don't look for a big discount to be sure, i just have never trusted anything that is sold above NAV. I think this is an innate prejudice of mine perhaps.