What investment trusts are you currently buying?

Thrugelmir wrote: »

Personally I switched towards individual companies when many trusts started trading at at a premium to NAV. Many are now back at discounts are now back.

That sounds really logical- why does an [apparent] market inefficiency like this exist though?

Thrugelmir wrote: »

Could be as simple as people cashing in after some years of good performance. Sell while at a premium. Underlying investments continue to rise in value. With little buying demand share price fails to move upwards or even drifts lower. .

But in an efficient market... why don't institutional investors, or other ITs buy when discounts arise?

bowlhead99 wrote: »

When you buy an investment trust, you're not [just] buying the individual assets which have their individual prices set by the stock exchange where they're listed.

You're buying them, but what you're buying is overlaid with a strategy from an investment manager who has his own performance track record:
- what he chooses to hold today is probably not what he will choose to hold in a couple of months time and you won't know what he actually chose to buy for some time;
- you know he has to keep holding a portfolio that includes emerging market infrastructure assets even if the macroeconomic conditions for emerging markets or for infrastructure assets are worsening;
- you know he's using gearing/bank borrowings to amplify the size of the underlying market returns (positively or negatively);
- you know if the underlying shares deliver a return over a particular hurdle rate, you'll be paying a large performance fee to thank the manager for achieving it, when you wouldn't pay that if you simply held the individual shares.
- you know the manager is holding large quantities of each of these underlying companies shares and may have liquidity issues if he tries to buy or sell a few million pounds' worth in one go, which you wouldn't have when selling a hundred individual shares of the individual companies.

So, all these things contribute to supply and demand for the investment vehicle itself, entirely independently of the supply and demand for the underlying companies which sit in different parts of the world.

As such, it makes sense that an investment trust might be available to buy at less than the apparent market price of its underlying net assets (though there are of course some investment trusts on premiums instead of discounts).

Generally a major one that the manager will cite in his factsheet as a reason for a discount is global macroeconomic factors causing people to simply not want to buy into a strategy of holding a pool of assets which have in common the fact that they are in a currently-undesirable sector. But basically it's just supply and demand for what the manager claims to offer versus what the individual companies appear to offer.

Thanks bowlhead99, I am sure that much of what you say is correct but I would like to offer a slightly different explanation.

This is based on the concept that the market for Investment Trusts is not a truly efficient market. It is rather a market designed for individual investors such as found on these boards.

In the UK (and probably globally) the vast majority of traded securities are owned by institutions of one kind or another. When it comes to shares, individuals own about 12% (source ONS) and when it comes to all investments, I recall seeing a figure reported which suggested that the total is less then 5%. In other words it is only a very small component of the total which are held and traded by individuals. The vast majority of investments are owned by institutions.

Now, the institutions will have little or no interest in trading IT’s, after all that is not what they are intended for. They will buy stocks, bonds, derivatives etc directly in the primary market. This is a very efficient market place where the tiniest movement in perceived value is reflected in the price.

On the other hand, individual investors wishing to buy into baskets of assets which are selected by a manager to fulfil the stated objectives of the collective investment might buy IT stock. This is not such a liquid market, not because shares in IT’s cannot be readily sold but because by their very nature, individual investors have a high degree of market inertia. People often hold the same investment for years on end.

We therefore have a single marketplace divided into two parts. One is quick reacting and efficient, the other relatively slow moving and somewhat inefficient. There is therefore a degree of decoupling between the two and that is what we see in the form of premiums/discounts.

Since individual investors tend to have somewhat different investment timescales to many institutions (at the extreme, sometimes decades rather than seconds), premiums/discounts tend not to be a particular issue for them.

Of course it is always nice to buy at a discount but if one is going to try and engineer such things then we get on to the issue of trying to time the market which is a whole subject in itself.

JohnRo wrote: »

I've just purchased BRFI as per my schedule. The premium/discount wasn't high/low enough to concern me.
Around August I have to decide on HICL, 3IN or something else to fill a 2% specialist slot in the portfolio. After that it'll be adding more of the same I already hold, as allocation dictates.

Portfolio

There seems a very large number of trusts in that pf and presumably a vast number of underlying shares. Was that the intention or just how it happened? Being lazy, I'd find it near impossible to keep tabs on that many ITs and try to have quite large sums in a far smaller number.

At the moment I'm also being quite wary of ITs until I get a feel of how markets might move. If retail confidence in the markets begins to slide there's every likelihood of discounts widening, as some have already, and I prefer not to be on the wrong end of that, especially those that are highly geared to boot. I won't always assume the IT to be the better option and will consider whether an equivalent ut/oeic is currently a better option or even individual shares.