Portfolio Allocation: Critique Welcome

DairyQueen

Thanks all for your feedback. It's really helping me to focus, and to review my aims and choices.

DairyQueen

IanSt wrote: »

However I wonder how much of the % increase is due to a discount reduction in the trust?

Sorry to ask but could you please explain 'discount reduction' in this context? I haven't a clue what that means. Yet another gap in my knowledge.

Thank you.

Voyager2002

DairyQueen wrote: »

Sorry to ask but could you please explain 'discount reduction' in this context? I haven't a clue what that means. Yet another gap in my knowledge.

Thank you.

And quite an important gap!

While the price of a unit in a mutual fund is always its "net asset value (NAV)" calculated from the price of the shares that the fund owns, a unit in an Investment Trust (and to a lesser degree in an ETF) trades for a market price that may be higher or lower than its NAV. It may well be that the market likes the way that an IT is managed, and so the market price for a unit in an IT may be higher than the NAV, so it is said to be trading at a premium. Conversely, when the market price is lower than the NAV the IT trades at a discount.

Now, there may be some reason why the market favours the management of a particular IT, and so its price may rise even though the value of the underlying assets (the NAV) does not change much. In particular, an IT that trades at a steep discount may reduce its discount. This obviously helps the investor, but is a different kind of growth than an increase in NAV.

IanSt

DairyQueen wrote: »

Sorry to ask but could you please explain 'discount reduction' in this context? I haven't a clue what that means. Yet another gap in my knowledge.

Thank you.

As per Voyager2002 the NAV and the share price of an investment trust can and usually does diverge. My worry with some investment trusts is that over the last ten years a lot of the divergence may be mainly mainly to the huge amounts of cash that governments around the world have being throwing around.

Had a quick look at the reports on their site and it looks as though a big bit of the share price increase is due to the discount tightening:

Performance YTD 1 year 3 years 5 years 10 years
NAV per share total return 6.7% 7.1% 34.6% 70.4% 80.5%
Share price total return 5.0% 12.9% 46.5% 93.8% 97.5%
RPI plus 3.0% per annum 5.8% 7.0% 16.5% 29.5% 75.7%
MSCI All Country World Index (50% £) 14.0% 17.8% 41.3% 93.2% 91.2%

E.g. over 10 years the share price has risen 97.5% whereas the NAV has only increased by 80.5%. Now that may continue, but when/if the world's economies start to get back to the way they were, then the share price may return back to more normal times and the share price will be hit relative to the NAV.

Prism

I hold about 8 funds (2 of which are passive) for my whole pension. If I was to slim this down just for part of the pension to just 3 active funds I would probably simply keep Fundsmith (maybe about 70%) to cover the US, UK and Europe and then one for Asia Pacific (I have Baillie Gifford Greater China) and another for Japan (I have Legg Mason). I'm not a fan of bonds just yet but maybe in a few years if the performance improves. I believe that Fundsmith is about as defensive as you get in equities while also providing a great return.

Audaxer

Voyager2002 wrote: »

And quite an important gap!

While the price of a unit in a mutual fund is always its "net asset value (NAV)" calculated from the price of the shares that the fund owns, a unit in an Investment Trust (and to a lesser degree in an ETF) trades for a market price that may be higher or lower than its NAV. It may well be that the market likes the way that an IT is managed, and so the market price for a unit in an IT may be higher than the NAV, so it is said to be trading at a premium. Conversely, when the market price is lower than the NAV the IT trades at a discount.

Now, there may be some reason why the market favours the management of a particular IT, and so its price may rise even though the value of the underlying assets (the NAV) does not change much. In particular, an IT that trades at a steep discount may reduce its discount. This obviously helps the investor, but is a different kind of growth than an increase in NAV.

But RIT Capital Partners currently has a 6.52% premium, averaging 5.92% for the last 12 months. Just wondering, how would an IT reduce its discount anyway - would it not have to raise it's NAV? If so, how would it do that?

Voyager2002

IanSt wrote: »

As per Voyager2002 the NAV and the share price of an investment trust can and usually does diverge. My worry with some investment trusts is that over the last ten years a lot of the divergence may be mainly mainly to the huge amounts of cash that governments around the world have being throwing around..

Yes, but surely the cash that governments have been throwing around will also have driven up the price of the shares that the IT holds. So when/if things get back to normal, is there any reason to believe that the correction will have a larger effect on IT prices (discounts getting greater) than on shares generally (a decline in NAV)?

Audaxer

DairyQueen wrote: »

.
I agree, volatility in retirement is not recommended but we are not yet retired so I may be using this as another justification for feeding my interest.

Although I am retired and wouldn't invest in 100% equities I don't think there is anything wrong with some volatility in retirement, especially if you have DB pension(s) and a good cash buffer.

OldMusicGuy

ianthy wrote: »

I am not experienced enough to comment really but do many investors in the UK have just 3 funds?

I do, but they are all multi asset funds so I don't regard them as "just 3 funds". I do not want to overcomplicate things, pay high fees and my investment goals are modest (2 to 3% net return will do me fine). I have a large DC pot spread across these three funds.

IanSt

Audaxer wrote: »

But RIT Capital Partners currently has a 6.52% premium, averaging 5.92% for the last 12 months. Just wondering, how would an IT reduce its discount anyway - would it not have to raise it's NAV? If so, how would it do that?

It could attempt to reduce the premium by selling more of its shares - an investment trust does not have to be 100% closed to new business. In the same way to reduce a discount it could purchase its own shares.

Voyager2002 wrote: »

Yes, but surely the cash that governments have been throwing around will also have driven up the price of the shares that the IT holds. So when/if things get back to normal, is there any reason to believe that the correction will have a larger effect on IT prices (discounts getting greater) than on shares generally (a decline in NAV)?

My worry would be that you would be hit by a double whammy of falling market prices and the discount going from a premium to a negative. But no-one knows 100%, but it is something that keeps me way from those investment trusts that I feel have maybe had the benefit of QE.