Investment trusts: the latest on discounts and premiums

If you like investment trust discounts, you are spoilt for choice. Of the 371 trusts listed in London, just 23 currently trade at a premium to their net asset value, while the other 348 trade at a discount. Only four trade at a premium of 10% or more whereas 224 are at a double-digit discount.

As a reminder, trusts are said to trade at a discount if their share price is less than the value of the trust’s assets on a per-share basis – or to put it another way, if the trust’s market value, also called the market capitalisation, is less than the net value of its assets (its total assets minus its total liabilities).

The opportunity to buy investment trusts at a discount is one of their key differentiators from other popular types of fund, such as unit trusts, open-ended investment companies (OEICs) and exchange-traded funds (ETFs).

We’ll look at some of today’s most extreme discounts and premiums, the history of investment trust discounts and the possible reasons for the current scarcity of premiums.

Today’s biggest discounts

The biggest trust discount at the time of writing is to be found on the Digital 9 Infrastructure trust and stands at 79.4%, according to the website of the Association of Investment Companies (AIC), the trusts’ trade body. Digital 9 has had a torrid existence and is in the process of winding itself up. Next is Home REIT, whose shares trade at a discount of 70.4%. Home REIT, a property fund, is also something of a special situation; its shares are suspended over problems with a string of tenants (the valuation on which the discount is based is also old, so the figures should be taken with a pinch of salt). Ground Rents Income Fund trades at a discount of 69.9%, thanks in part to changes in the law relating to ground rents. Nine further trusts have discounts of between 60% and 70% while six trade at discounts of between 50% and 60%.

Today’s biggest premiums

At the other end of the scale, shares in JPMorgan Emerging Europe, Middle East & Africa trade at a premium of 117.6%. Again there are special circumstances; the trust was formerly JPMorgan Russian Securities and its assets were severely hit by the Russian invasion of Ukraine. The premium reflects optimism that ultimately the value of these assets may recover. Closer to home, shares in 3i, the private equity trust, trade at a premium of 51.6%, in part thanks to the spectacular growth of its largest holding, the European discount retailer Action.

Doric Nimrod Air Three enjoys a premium of 37.7%, which reflects the wide range of possible outcomes when its assets, Airbus A380 jets, come to the end of their contracted leases with the Emirates airline. Investors clearly think the aircraft are valued conservatively and that the trust’s true net asset value is considerably higher than the official one.

By stark contrast with the long list of wide trust discounts, only one other listed fund can boast a premium in double figures: Marble Point Loan Financing, whose premium is 15.9%. Only a further 19 trusts trade at a premium.

How discounts have waxed and waned in the past

At the end of December 2008, in the midst of the global financial crisis, discounts widened to an average of 18.2%. However, by the time the crisis was easing at the end of 2009, the average discount had narrowed to 10.5%. And by the end of 2013, when economic conditions were better and markets were thriving, discounts were down to 4.6%. They went on to narrow further and even, if briefly, disappear: a couple of times in 2017/18 the average trust traded at a small premium. After that, though, discounts widened again, peaking at 17% in October last year before narrowing again to 11% in March and further still to today’s level of 5.4%.

Why are trusts trading at discounts?

That figure of 5.4% may not sound like much but it is distorted by the giant premium on 3i’s shares referred to earlier. Because of that big premium and because of the sheer size of 3i as a business (at a market value of £30.5bn it is far and away the largest investment trust), the effect on the average discount is huge: if we exclude 3i from the calculation, the average investment trust discount jumps to 14.6%.

There are several reasons for this. One is simply that investment trusts are British stocks and Britain has been decidedly out of favour with international investors since the vote to leave the EU. Another is that many of the traditional buyers of investment trusts, such as wealth managers and managers of multi-asset funds, have lost their appetite for trusts over the past decade or so. Often this is no reflection on the quality of trusts as an investment vehicle; it is more to do with the fact that many trusts are simply too small for these institutions, many of which are getting bigger as a result of mergers, to invest in.

Another factor is that many trusts that invest in ‘alternative’ assets such as infrastructure floated in the period following the financial crisis while official interest rates were near zero and investors were desperate for income. Demand for those trusts pushed their shares to a premium but the trend violently reversed when interest rates were increased to tackle inflation and these trusts now tend to trade at considerable discounts. Finally, the perception of some trusts has been damaged in certain investors’ eyes by apparently high charges. Investment trust champions say trusts are unfairly penalised relative to other types of fund in this respect and are campaigning for a change in the rules.

If you want to investigate investment trusts discounts further, there is a wealth of information to be found via the AIC’s ‘compare investment companies’ tool.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing, please read the relevant key information document which contains important information about each investment trust. The shares in these investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.