Investment Trusts

cloud_dog

Looking for a discount point is a very subjective matter and it will vary with the It and with the general cycle where the trust invests in.

Back in the day I used to trade an IT regularly purely based on the discount / premium (I think it might have been General Consolidated; definitely had 'Consolidated in it). It used to swing between -5% and almost up to +10%; I'd sell around +6, +7, +8 and buy back when it was -3, -4.

The premium / discount on ITs can be your friend for many reasons but understanding those reasons is critical.

StellaN

cloud_dog wrote: »

Looking for a discount point is a very subjective matter and it will vary with the It and with the general cycle where the trust invests in.

Back in the day I used to trade an IT regularly purely based on the discount / premium (I think it might have been General Consolidated; definitely had 'Consolidated in it). It used to swing between -5% and almost up to +10%; I'd sell around +6, +7, +8 and buy back when it was -3, -4.

The premium / discount on ITs can be your friend for many reasons but understanding those reasons is critical.

So Fidelity Asian Values (FAS) is today at -2.17% discount and Scottish Mortgage (SMT) is at 3.26 premium. Are these still good value trusts at these discount/premiums?

cloud_dog

StellaN wrote: »

So Fidelity Asian Values (FAS) is today at -2.17% discount and Scottish Mortgage (SMT) is at 3.26 premium. Are these still good value trusts at these discount/premiums?

This is where you cannot really use the premium/discount as any sort of comparison value. The premium/discount is relevant to the trust and also as one of the measures you might use to compare it against its peers.

These two trusts are well respected trusts returning good value but you cannot compare the two as they have a different focus.

A lot of investments with assets / revenue overseas have done extremely well in GBP recently simply because of the devaluation of the GBP.

As a very general rule, it is not ideal to buy a trust at a premium; simply as it means you are paying more for the underlying assets than they are actually worth. Having said that I have bought trusts when they have been at a premium.

Perhaps you need to take a step back, and consider what is your main objective for your investment, i.e. geography / asset / general focus? Once you are clear on that you can then compare like with like and can also use the premium/discount as one of the measures you consider as part of your decision process.

You mention perhaps more technology or a technology focus, have you considered a global technology fund and to invest a weighted amount, i.e. if you usually have approx £5k in a global fund put £1k in a global tech fund.

Also, why specifically an IT, and not a OIEC? I see from your original post that you appear to hold a mix (OIECs / ITs)?

EDIT: I am a fan of ITs.

bowlhead99

StellaN wrote: »

So Fidelity Asian Values (FAS) is today at -2.17% discount and Scottish Mortgage (SMT) is at 3.26 premium. Are these still good value trusts at these discount/premiums?

They are fine. At current prices you will be paying a bit below or above the value of the respective trusts' underlying net assets, based on supply and demand - what people in the market think of their overall prospects. From time to time people might think that the "whole package" of assets, liabilities and management team is worth more, or less, than the sum of its parts.

If you like, you could hold out until market forces indicate that people dislike them more and are only willing to pay less money for each share as a proportion of the declared value of the portfolio. In other words, when the shares in the trust are trading at a smaller premium or greater discount.

However, depending on the value of the underlying assets in the meantime, you might still end up paying a higher absolute price for the shares and have missed the gains. And if everyone in the market (who you can generally presume to be more knowledgeable than you) says they are only willing to pay a discounted price for the shares at that time it is hardly a vote of confidence in the strategy in the face of whatever market headwinds are afoot.

So, there is no harm in paying a premium for an investment trust with a management team which has a great track record and has assembled a decent portfolio which you can buy through them much easier than building your own portfolio of underlying assets. And there is no issue with buying at a slight discount either, which simply indicates the trust is not as favoured as it could be, so might be a relatively cheaper time to buy it. But you have to take your oven view on this stuff. As cloud_dog says, looking for a discount point is subjective.

If you've read all the last few years' quarterly and annual reports of an investment trust, and any announcements they've made since their last report; and are happy with what they are doing, how they are doing it, what the risks are in terms of portfolio concentration, gearing, performance fees etc and are happy that the price for the trust is fair given historic rates of discounts or premiums across different market conditions; then there should be no issue whatsoever with just paying the "going rate" for the shares of the IT - i.e. whatever is shown on the stock exchange right now.

If you want something simpler, which many people new to investing do, then start with open-ended funds on a fund platform, to which you can subscribe or redeem at most recently calculated/estimated NAV of the underlying holdings.

StellaN

cloud_dog wrote: »

This is where you cannot really use the premium/discount as any sort of comparison value. The premium/discount is relevant to the trust and also as one of the measures you might use to compare it against its peers.

These two trusts are well respected trusts returning good value but you cannot compare the two as they have a different focus.

A lot of investments with assets / revenue overseas have done extremely well in GBP recently simply because of the devaluation of the GBP.

As a very general rule, it is not ideal to buy a trust at a premium; simply as it means you are paying more for the underlying assets than they are actually worth. Having said that I have bought trusts when they have been at a premium.

Perhaps you need to take a step back, and consider what is your main objective for your investment, i.e. geography / asset / general focus? Once you are clear on that you can then compare like with like and can also use the premium/discount as one of the measures you consider as part of your decision process.

You mention perhaps more technology or a technology focus, have you considered a global technology fund and to invest a weighted amount, i.e. if you usually have approx £5k in a global fund put £1k in a global tech fund.

Also, why specifically an IT, and not a OIEC? I see from your original post that you appear to hold a mix (OIECs / ITs)?

EDIT: I am a fan of ITs.

I now only hold one fund in each geographical region and currently I have about 40% of my portfolio in the global fund (Fundsmith).

The reason behind my interest in SMT is to slightly diversify my global fund mainly because SMT is more tech based and has different holdings to Fundsmith. Therefore, I thought I would switch half of Fundsmith into SMT?

This is also the same thought behind FAS - I currently hold Stewart Asia Pacific Leaders and am looking at switching half of this fund to FAS? Yet, again different holdings/asset allocation for this region.

Am I looking at this the wrong way or is it OK to invest in two different funds/trusts per region if they have different asset allocations to diversify and spread my holdings in these sectors?

Alice_Holt

StellaN wrote: »

is it OK to invest in two different funds/trusts per region if they have different asset allocations to diversify and spread my holdings in these sectors?

Seems sensible to me.
It's what I have done when allocating money to active funds within sectors.

cloud_dog

StellaN wrote: »

Am I looking at this the wrong way or is it OK to invest in two different funds/trusts per region if they have different asset allocations to diversify and spread my holdings in these sectors?

Obviously, you need to do what you feel comfortable with.

There is an argument that you should not hold two funds with the same focus, or rather the benefits of doing this may be 'averaged down' by doing so. Whilst I understand the concept, can't say I'm particularly sold on it, especially where you can find two well performing funds with significantly different either strategy or investments (in the same focus, i.e. Asia).

The HL website is quite useful for reviewing current holdings / investment allocations for funds.

Just using the asia funds as an example the FAS and Stewart Asia Pacific Leaders have similar but maybe different enough country and sector allocations to make them complimentary.

Either way you have identified, in my option, well respected funds so if you are comfortable / feel you need to split your investments across two funds for the two regions then that is probably what you should do.

I think as bowlhead99 surmised previously, I don't think you need to worry too much over the premium; it's not very large and for a long-term investment not something to get hung up on, same for the discount.

StellaN

cloud_dog wrote: »

Obviously, you need to do what you feel comfortable with.

There is an argument that you should not hold two funds with the same focus, or rather the benefits of doing this may be 'averaged down' by doing so. Whilst I understand the concept, can't say I'm particularly sold on it, especially where you can find two well performing funds with significantly different either strategy or investments (in the same focus, i.e. Asia).

The HL website is quite useful for reviewing current holdings / investment allocations for funds.

Just using the asia funds as an example the FAS and Stewart Asia Pacific Leaders have similar but maybe different enough country and sector allocations to make them complimentary.

Either way you have identified, in my option, well respected funds so if you are comfortable / feel you need to split your investments across two funds for the two regions then that is probably what you should do.

I think as bowlhead99 surmised previously, I don't think you need to worry too much over the premium; it's not very large and for a long-term investment not something to get hung up on, same for the discount.

Thank you for your input and, yes that's what I thought about the Asia funds (FAS & Stewart) in that they have different enough country and sector allocations to make them complimentary so I will go ahead with this as it feels right for me.

The Fundsmith and SMT mix is a bit more of a dilemma for me in that although both are global and SMT are far more tech based it is whether they are as complimentary as the Asia funds?

The Fundsmith fund has given me good returns but I do like the countries and sector allocation of SMT, so the dilemma is whether to split my global holdings between the two or indeed go with one fund which at the moment I am leaning towards SMT?

bowlhead99

StellaN wrote: »

The Fundsmith and SMT mix is a bit more of a dilemma for me in that although both are global and SMT are far more tech based it is whether they are as complimentary as the Asia funds?

Smith is basically consumer defensive whereas SMT has a lot of high tech.

So, you could say that they are complementary - because they each hold things that will perform relatively better or worse in different parts of an economic cycle while both being good at what they do, allowing you to buy both and benefit from the diversification by periodically rebalancing between the two.

Or, you could say that one of them is doing it right and one of them is doing it wrong for the market conditions that will be experienced over the next decade, and go with the one you believe to be the best, as a straight gamble.

There is certainly a logic in admitting you don't know what will be best out of the two styles of concentrated, conviction-driven holdings, and buy both.

Obviously if you buy both you are averaging-down the performance of whichever one ends up being best, though with periodic rebalancing you will be able to top up the relatively weaker one with profits from the stronger one as you go from year to year, so the blended performance may be better than the average of its parts.

Of course, if you extend the logic of "buy multiple managers covering global equities" too far, you will end up with a pretty mundane result because you may end up buying a lot of dogs to go with the superstar companies by putting your faith in the consensus view of loads and and loads of managers, many of whom might have diametrically opposed views to SMT and Smith.

Morphoton

With regard to Discounts & Premiums it can be useful to see how these have changed over the past few years and Morningstar has graphs for up to the past 10 years. For SMT see below. Whilst it is usually better to buy on a discount and sell on a premium it cannot always be done and I do hold two ITs which are currently at a premium (BGS & BRFI). I would personally be cautious if the premiums start to get excessive, say much above 5%.

http://tools.morningstar.co.uk/uk/cefreport/default.aspx?tab=1&SecurityToken=E0GBR00R1S%5D2%5D0%5DFCGBR%24%24ALL&Id=E0GBR00R1S&ClientFund=0&CurrencyId=GBP