High premium IT’s

Prism

As an example Smithson (SSON) issues new shares almost every day to keep the premium to around 2% and to hopefully make more money for those already invested by raising additional money to invest. I believe this is what PHI has been doing recently.

Albermarle

On the other side , infrastructure trusts seem to usually have a high premium . I presume because the underlying assets often have guaranteed income streams regardless of their actual asset valuation ?

bowlhead99

Albermarle said:

On the other side , infrastructure trusts seem to usually have a high premium . I presume because the underlying assets often have guaranteed income streams regardless of their actual asset valuation ?

They haven't always had a high premium, but vehicles that have a blend of investments that share some of the characteristics of both debt and equity and produce solid yield have become quite 'in demand' in recent years since global interest rates fell to the floor post credit-crunch. 

While the income and asset values do come with risks (e.g. toll roads and railway lines and some types of ports/shipping or transportation businesses had their incomes potentially devastated by covid lockdowns while still needing to service the associated debts/ financial gearing) the general chase for income means that people are willing to pay a higher going rate for the coupon than implied by the NAV, as they look out for any financial investments that might be thought of by some as 'bond proxies'. 

That latter term has quite a loose definition and has been overused in recent years - but income is important for some types of investors causing them to buy (e.g.) Unilever equity or a portfolio of infrastructure projects where previously they may have got a satisfactory amount of income from lower tier investment-grade bonds and been entirely unwilling to take on equity-like risks to get any more.

Apodemus

I would imagine, also, that between the dates of formal valuation announcements, NAV figures are best-estimates and there will always be scope for doubt over the valuation of illiquid assets or stakes in unlisted companies.

Moe_The_Bartender

There is an OEIC equivalent to Pacific Horizon called BaillieGifford Pacific. Buy that and there’s no premium. It’s not exactly the same as it doesn’t use gearing or invest in private equities but you can hold it until the premium reduces and then switch to the IT.

Moe_The_Bartender

bowlhead99 said:

Alexland said:
 It's all a fine balance but it seems when the discount is over 10% in normal market conditions something has to be done about it. If the trust keeps needing to execute buybacks to limit the discount then the board might even consider replacing the manager.

You do tend to see some types of trusts or investment companies on long term discounts though, e.g. those operating in illiquid sectors such as private equity or with particular types of holdings.

So private equity funds-of-funds for example like Harbourvest (HVPE) or Pantheon International (PIN) are generally not going to be under 10%. The market discounts the 'fair value' NAV for illiquidity because the trust could not get its money back tomorrow at the declared value, it might take years; and there is a risk of the trust having its own liquidity problems in meeting unfunded commmitments to investees which could cause it to need to offload assets in a fire sale (or raise new money in the market) to get the capital to meet funding obligations or make important follow-on investments to preserve the value in the underlying investee holdings.

In such cases, 30%+ might be an attractive discount caused by rocky market conditions (e.g. 2009 or this March) while 15-25% be more of a normal mundane one rather than exceptional, and a mere 5% unheard of.

HVPE is one that I hold and has traded at an average discount of about 26% which has narrowed recently (the share price jumped 7% yesterday). It declares a NAV monthly but that is an estimate and I believe that it only has an audited valuation annually. Most PE funds have similar discounts, the only exception that I know of being 3i which has traditionally traded at a premium - currently 28% compared to its average of about 8%. Eyewatering.

bowlhead99

Moe_The_Bartender said:
Most PE funds have similar discounts, the only exception that I know of being 3i which has traditionally traded at a premium - currently 28% compared to its average of about 8%. Eyewatering.

The ones that directly hold the private investee companies (or hold them in their other own-managed fund vehicles) can tend to have lower discounts than ones such as HVPE which participate in funds or coinvestment vehicles run by others, as the latter are a further step removed from having liquidity / control over the underlying investment exits and may have structural risks (e.g. significant long term ongoing commitments to investee funds that need to be funded without certainty of timing).

3i plc is an outlier because it is a fund management business earning management fee income from third party investees into its managed funds as well as holding a portfolio of its own 'house' investments on its books. So the market is not just valuing it at the value of its own investment assets and liabilities and cash in the bank etc, but also including a multiplier on its investment management business income streams, which are not sitting on its balance sheet at a NAV.  Its similar to how you wouldn't value a bank or insurance company business purely by counting up the actual assets and liabilities on its balance sheet at a point in time - it's only part of the story.

So when you look at data for performance of listed private equity vehicles, you sometimes see people publishing the data might adopt a benchmark of the universe of listed private equity vehicles 'ex-3i' - because 3i is not just an investment portfolio and the value (and the level of discount and premium) of that entity would differ from pure 'fund' vehicles which are just a portfolio of valued investment assets (whether funds or directs).

Likewise something like Lindsell Train's investment trust has a large investment in the LT management company accounting for a good chunk of its value (which is valued subjectively and probably conservatively in its books), so that trust isn't solely valued by the market at the declared value of its portfolio, as its portfolio of listed companies is only one bit while the private ownership of the LT fund management business is another. 

Thrugelmir

Stargunner said:

I was just curious as to is the reason for the decline this week that they are reducing their premium and what is the reason that  IT’s have these premiums.

How much as an investor are you prepared to pay to access the underlying investments held?  You'd buy such a trust for a reason. Finding interesting investment ideas come about through research. The more opaque the company/market. The greater the challenge to really know what is going on. The world is far from a level playing field when it comes to corporate governance and accountability.