Investment trusts - does the discount / premium really matter?

ColdIron

Albermarle said:

Discount is an embarrassment to the IT management because it shows the assets would be worth more if they were not in charge of them.  

I thought another reason for discounts for some IT's was that the NAV wasn't trusted/believed by the market , as some assets value can be open to opinion 

It's not usually that the current NAV is disbelieved, a premium or discount is generally a reflection of investor sentiment of a trust's future potential which could be for one or more of a variety of reasons

Cash-Cows

As trusts differ I suggest the OP digs into the annual reports as well because it is there they will set out their policies on dealing with discounts and premiums. A check can then be made as to whether the trust is operating within those policies. 

John464

Albermarle said:

Discount is an embarrassment to the IT management because it shows the assets would be worth more if they were not in charge of them.  

I thought another reason for discounts for some IT's was that the NAV wasn't trusted/believed by the market , as some assets value can be open to opinion 

Yes, but that still comes under the broad heading of bad management. - Like when no one believed Woodford's valuations.

John464

I only buy when they are at a discount because I think its easier for a bad management to improve, than it is for a good management to do even better - especially in the long term.
Warren Buffet said something about not buying a company that depends on the management staying above average

ColdIron

The trouble with that approach is that many good ITs can trade at an almost permanent premium and you are pretty much excluding them from your pool of potential investments. How long are you prepared to wait?

Thrugelmir

ColdIron said:

The trouble with that approach is that many good ITs can trade at an almost permanent premium and you are pretty much excluding them from your pool of potential investments. How long are you prepared to wait?

Wait long enough there's always an opportunity. Meanwhile there's better value to be found elsewhere. IT's are a broad universe. 

MarkCarnage

IT's investing in illiquid assets will very probably be trading at a much wider discount to stated NAV now than a couple of months ago, for the simple reason that the market is discounting a significant change in the next NAV calculation. Property, infra, some illiquid debt and private equity will all fall into this bag. However, it may well be that the share price move has been overdone.

There are other reasons for a significant premium or discount. Law Deb used  to significantly undervalue the core Trustee business which it owned (held at book cost or similar) and hence the IT itself traded at a significant premium to stated NAV as investors put a market valuation on that. Conversely, Pantheon the PE IT used to trade at a significant discount to NAV (20 years ago or so) as it had quite an inefficient capital structure, which meant it held a significant % of assets in low risk highly liquid form such as gilts. Whilst this did dilute the fund returns, it also led to the situation where the trust traded at a material discount to NAV. Given that maybe 40% of that NAV was in gilts, and the discount was in the mid 30s (with the gilt NAV being observable daily), it meant that you could effectively buy into the core PE assets extremely cheaply. Eventually, the Board were pressured into coming up with a better capital structure and the discount narrowed significantly. 

I tend to keep a short list of trusts that I like, and if there is a premium of more than a % or so I wouldn't buy them, as there will always be a time when that premium narrows or even moves to a discount. Always be aware too that in times like present, with relatively illiquid markets in some stocks, and wider spreads, that if a significant holder either decides to sell or is forced to sell (margin call maybe?) then the trust share price can take a battering for no good long term reason. This has happened to a couple of holdings I've had over the years. The trick is to do some homework to be as clear as you can that there IS no good long term reason.