Premiums/discounts on Investment Trusts

Surreyboy

Hi everyone,

I have a holding in Scottish Mortgage IT. I have been intending to buy more and thought that the recent dip in stock markets was a good opportunity. The share price has been about 255p today, about 10 % below its recent high of 283p.

However, the premium has also widened to 3.30 (above its 12 month average of c 2.5). I guess that this will be because the NAV has fallen even further (sorry for stating the obvious).

One would often prefer to buy when the premium is narrower (or there is a discount).

If the price has gone down fairly significantly, but the premium has widened a little, would this still be a reasonable time to buy?

Thanks!

cloud_dog

I used to trade some of my ITs based on the discount/premium (buying and selling appropriately).

Unsure how up to date your information is, i.e. prices are likely to be real-time (delayed by 20 mins) but the NAV may only be calculated at the end of each day. If it is then this would probably explain the widening of the premium; so at close tonight your (NAV) data may be updated and you find the premium to be a similar percentage.

Do you have access to real-time (ish) NAV data?

Surreyboy

Thanks for the reply. No the site I was looking (Morningstar) has the NAV as at 7.1.15.

cloud_dog

As I'm sure you are aware buying things at a premium is never an ideal situation but a lot of well run ITs do run almost permanent premiums.

I have bought ITs running a premium but I monitored the premium and bought when it and the SP was at a lower point in the cycle.

cloud_dog

Going back to your original question.... I think you have the evidence to ignore the differentiation in the SP / NAV as you now know why it has widened.

With regard to making a purchase I'm afraid only you can decide that one.

bowlhead99

Surreyboy wrote: »

Thanks for the reply. No the site I was looking (Morningstar) has the NAV as at 7.1.15.

You still have an inherent delay though. The nav(including any accrued income) will only be calculated and informed to the market as of an end-of-day point, for which a price *was* also available at that time.

This lets you see what the premium or discount *was*, with hindsigh, but you can't see what the premium *is* at the time you deal. In other words, nobody being told on Monday morning what the discount would have been on Friday night, can go back in time to Friday night and buy at that discount. All they can do is buy at the current price (which may or may not be same as Friday's price...) but it will not necessarily be at that same level of discount ; in fact, the very fact of the nav/discount being published will possibly change the discount or premium as people see that new information as a reason to pile in or out.

If the share price of the underlying shares fall without people who own the IT thinking their basket of companies is inherently less valuable than it was the day before, then their strong belief and continuing demand for the IT at its high price will stop the IT price falling and the premium to NAV will widen.

It is then less of a bargain than it was the day before but likely still cheaper than you directly buying all the constituent components in their various weights, for yourself. So you might still want it, just like the other people want it, which explains why people are not just dumping it at a lower price even though its assets are falling in value.

Of there is a premium at all it is because people think the sum of the parts, managed by a respected manager in a sector that isn't too illiquid or heavily out-of-favour, is more useful than owning the individual assets which underpin the NAV.

BrockStoker

Hope you don't mind if I use your thread to ask another related question Surreyboy:

I noticed that last week Henderson Opportunities had a rather intriguing drop - one day the share price dropped with the NAV remaining the same, the next the NAV dropped whilst the share price remained the same.

Does the fund manager have any control over which price drops? It seems to me that the drops in value were purposely being "diluted" between share/NAV so that neither dropped too much. Could that be the case?

I'm thinking of topping up HOT since it's fallen so much, but I'm already overweight with HOT and UK funds in general, so I'm a bit weary.

bowlhead99

BrockStoker wrote: »

Does the fund manager have any control over which price drops? It seems to me that the drops in value were purposely being "diluted" between share/NAV so that neither dropped too much. Could that be the case?.

It doesn't seem like anything was diluted because after the two full days, the NAV and share price have both moved.

Why should either have moved further?

The share price and NAV are not controlled by the manager but by outside forces. If I want to buy a share in the investment trust at £1 but wouldn't mind paying £1.01, and you don't want to sell for less than £1.01, I'll have to pay £1.01 and that will be the price. manager doesn't set it, you and I do.

Maybe the day earlier I would have been willing to pay £1.05 but I think the bottom is going to fall out of the market with this China malarkey, so I reduce my offer to £1.01. The price visibly moves down. The next day, the manager counts up all the assets and sees that the bottom did indeed fall out of the market and the assets are worth £0.98 instead of the £1.02 they'd been earlier in the week.

In that example the NAV drop followed the share price drop but nothing dodgy going on.

BrockStoker

bowlhead99 wrote: »

The share price and NAV are not controlled by the manager but by outside forces.

That's what I thought, but I just wanted to make sure that there wasn't something I wasn't fully aware of occurring there. Thank you again for your informative replies bowlhead.

george4064

Dont forget that managers can issue new shares and buyback shares to try keep the discount/premium under control, this is the closest they get to controlling the NAV per share.

Surreyboy

cloud_dog wrote: »

I used to trade some of my ITs based on the discount/premium (buying and selling appropriately).

Unsure how up to date your information is, i.e. prices are likely to be real-time (delayed by 20 mins) but the NAV may only be calculated at the end of each day. If it is then this would probably explain the widening of the premium; so at close tonight your (NAV) data may be updated and you find the premium to be a similar percentage.

Do you have access to real-time (ish) NAV data?

Thanks for the previous replies about the widening premium on Scottish Mortgage. That would explain it if the (realtime) price was rising while the previous day's NAV had not yet been updated. However, today, SMT's price was decreasing, so wouldn't you expect the premium to narrow?

Although I note that Morningstar appears to give an estimated up to date NAV, so maybe they got a bit carried away reducing the notional NAV.