IT discount to NAV

brodev

There are some ITs trading at as much as 75% discount to NAV. eg. European Equity Tranche Income. I must be missing something very obvious but I cannot see why this is not a massive buying opportunity except for the fact that it is there. Can anybody enlighten me?
On the subject of discounts does anyone know of a program or website that will point out the ITs with large discounts?
TIA

RayWolfe

Supply and demand and peoples perception of future performance.
Your second question will be answered at:
http://www.trustnet.com/it/funds/perf.aspx
Click on the discount column.

meester

Most of the trusts with high discounts to NAV are property trusts. This is to a great degree because they are marked to market and highly illiquid, and investors believe prices will fall and the assets would not fetch the supposed value on sale. If you are holding property, you can't easily exit the market and hold cash like you would with shares, so the NAV is a statement of what investors believe is inevitable.

Generally a high discount should mean that the NAV is going to fall in the near future, either because of the sector, or simply because the investment manager is destroying shareholder value. There may also be liquidity problems, e. g., on small company shares the spread is quite large.

Also there should naturally be a discount for most funds, because the management overhead is destroying some of your investment.

It is not a reason to buy as such: you have to decide whether the discount represents a good opportunity or not. Also a look at historical discounts would help. For instance, the UK small companies sector is trading at 10-20% discounts:

http://www.trustnet.com/it/funds/perf.aspx?reg=1&class=conv&sec=2

But is this a historically abnormal discount?

If you believe UK Small Companies will outperform in the future, then assuming that the discount in good times has been smaller than this, you would benefit from the NAV rising, and the discount narrowing as welll.

For a given fund, you can get historical discount data:

http://www.trustnet.com/it/funds/chart.asp?unit=905070#disc

Over 5 years, for a particular fund now trading at a 20% discount, the biggest discount was about 24.5%, and for a substantial period the discount ranged around 14-15%. So a 19% discount is not such a great opportunity outwith the performance growth.

Mr_Mumble

Specifically on European Equity Tranche Income: the company invests in non-investment grade (i.e.junk bond) RMBS (Residential Mortgage Backed Securities) and ABS (Asset Backed Securities). :eek: The stated NAV is likely to differ significantly from the real worth of the assets!

EET has other problems, it is borrowing money at a very high rate of interest ( 250-500 points above euribor) and a change in Italian law has seen it lose cashflow from its investments there. The dividend has been cut from by 75% - never a good sign.

Generally I avoid any IT where the discount is >30%. There will be a good reason for the high discount usually to do with debt and/or a mispricing of assets.