Investment Trusts, Price v NAV

Hibee16

Hi - Let me start by saying I know what the Price and the NAV of an Investment Trust represent.  My question is: What factors influence the gap between the Price and the NAV?  Sometimes the NAV is considerably higher than the Price, sometimes not, occasionally even less than the Price.
Thanks
Hibee

Linton

The price is what people are prepared to pay, the NAV is the value of the underlying assets. The NAV and current price of an IT may differ for many reasons such as:
 - the NAV is usually only released once a day
 - the fund may hold assets (eg property or unlisted shares) that are infrequently revalued so the NAV could be misleading
 - some funds may have a reputation for good returns so people are prepared to pay more for the IT than it is currently worth just looking at the underlying asset prices

Albermarle

Also maybe the NAV is not fully believed to be accurate . Valuing some assets is not that easy and could be open to opinion.

Prism

Its primarily based on investor sentiment. An equity trust on a premium usually suggests that the investors like the sector/region/approach of that trust and have faith in the management team to run the trust well. When you see a trust drop to a discount it might mean that they have less faith in one or more of those things. Typically most trusts run on some level of discount which is one of the things that makes them attractive.

For example, during an equity crash, investors may still trust the management but not the market it invests in, so they sell. In another example, lets say the management has been underperforming their own published benchmarks (not always the same as an index) for a period of time. Maybe investors simply begin to drift off elsewhere, again causing a drop in share price. In a more extreme example, sometimes trusts come under attack from someone who publicly shorts the trust, usually alongside some damning report on shady details about the directors or board of the trust. Then you tend to see the share price drop heavily until the truth emerges. Eventually the NAV drops to the lower price or the price recovers to some extent.

Thrugelmir

Also be wary of press and media coverage. Market makers read what you do. Prices get adjusted both up and down before you can place a trade. 

Worth looking closely also at the IT's largest holdings. Investors may selling out of a stock due to something they don't like. An expectation of a fall in a particular share price for example. This will cause the discount to widen. If there's insufficient buyers in the market to pick up the slack.  Liquidity isn't always great in IT's. Can be frustrating to offload sizable positions. 

george4064

Investor/market sentiment.

MarkCarnage

There are several historic examples of trusts which traded at a significant premium or discount to stated NAV. 

The reasons were known, and in many cases, these were resolved. Examples:

Law Debenture materially undervaluing its own Trustee business in its NAV until a realistic valuation was included in NAV. Premium to NAV for many years. 

Pantheon Participations holding significant gilts/cash until a capital restructuring which allowed much fuller deployment of capital in private equity. Discount to NAV....to the extent that for a time the significant gilt holdings were effectively valued at next to nothing in the share price. 

Nowadays many trusts have a discount management mechanism allowing the issuance/repurchase of equity to try to keep the discount/premium range within sensible bounds.

A number of infrastructure ITs have traded at substantial premia to NAV on 'scarcity' grounds plus attractive yields.

These things all have a habit of correcting.....buying an IT on a premium rarely makes sense unless there is a strong reason to believe that the NAV is being understated. 

DireEmblem

Linton said:

The price is what people are prepared to pay, the NAV is the value of the underlying assets. The NAV and current price of an IT may differ for many reasons such as:
 - the NAV is usually only released once a day
 - the fund may hold assets (eg property or unlisted shares) that are infrequently revalued so the NAV could be misleading
 - some funds may have a reputation for good returns so people are prepared to pay more for the IT than it is currently worth just looking at the underlying asset prices

Agree with this.

Its exactly why if I am investing long term, I look at what wrappers different investment strategies I like are in.  If there is an Investment Trust and ICVC version of the same, then I buy the Trust when its trading at a discount, and later sell and swap to the ICVC when at a premium.

Its not 100% guaranteed to increase my return, the Trust may never trade at a premium, nor would the performance be like for like between one and the other, but I have found over my own picks that it appears to do well.

Audaxer

MarkCarnage said:

A number of infrastructure ITs have traded at substantial premia to NAV on 'scarcity' grounds plus attractive yields.

These things all have a habit of correcting.....buying an IT on a premium rarely makes sense unless there is a strong reason to believe that the NAV is being understated. 

I bought a couple of Infrastructure ITs on premiums as they had fairly attractive yields and dividends increasing each year. They seem to be constantly on a premium so it didn't really concern me. I don't intend to sell, but if I did I would be looking at the current share price rather than the Nav.

I was also looking at UK Smaller Companies ITs the other day, and noticed they all seem to be trading at a discount. I looked at Henderson Smaller Companies in particular, which appears to have a very good historic performance, but it always seems to trade at a discount, but I'm not sure why? 

DireEmblem

ITs trade on sentiment rather than the actual value of the underlying holdings.  ITs have their place - very good for say having access to invest in unlisted companies, but have access to exit should you need to.

Albermarle

I was also looking at UK Smaller Companies ITs the other day, and noticed they all seem to be trading at a discount. I looked at Henderson Smaller Companies in particular, which appears to have a very good historic performance, but it always seems to trade at a discount, but I'm not sure why? 

Maybe it is because valuing smaller companies is not an exact science. Maybe the valuations are seen as on the optimistic side by the shareholders of the IT ? Just a guess .