Page 12 - DIY Investor Magazine | Issue 37

Apr 2023 12 DIY Investor Magazine · INVESTMENT TRUSTS: SHOPPING FOR DISCOUNTS Could wide investment trust discounts represent an opportunity? UK investment trusts are trading at the widest discount seen since the financial crisis, according to recent research from Numis. The share price of the average investment trust was trading 13% below its net asset value in 2022, with the discount widening considerably in the aftermath of Russia’s invasion of Ukraine and as rising interest rates and a worsening economic environment impacted investor sentiment. This suggests that there is value to be found in this well- established and diverse part of the UK investment industry. The chart below shows that discounts do tend to widen during times of economic and market uncertainty, but ultimately, such a steep level of discount does not last long. This could, therefore, be a good time for investors to be considering investment trusts as a buying opportunity. DISCOUNTS EXPLAINED Investment trusts are stock market listed companies, so their shares are subject to the forces of demand and supply. A stock market works by setting a price at which demand (the quantity of shares that investors want to buy) and supply (the quantity of shares that investors want to sell) are in equilibrium. As demand and supply change over time, you should expect a share price to move to maintain the balance between these two forces. ‘THERE IS VALUE TO BE FOUND IN THIS WELL-ESTABLISHED AND DIVERSE PART OF THE UK INVESTMENT INDUSTRY’ This is the same for all quoted companies, but with investment trusts there is an additional measure of actual value, against which the share price can be compared. This is known as ‘net asset value’ (NAV for short), and it is essentially the value of all the assets held in that investment trust’s portfolio at a given point in time expressed on a per share basis. Most investment trusts release their NAV every working day, but some – particularly those that invest in less liquid or private assets – may release their NAVs less frequently. The presence of a NAV calculation means that investors get a regular look at the actual value of that investment trust which they can then compare to the prevailing share price to get a sense of how cheap or expensive it is. This is a key differentiator between investment trusts and other ‘open-ended’ investment vehicles such as OEICs, ICVCs and unit trusts, where the value at which investors can buy or sell units is determined explicitly by the net asset value, and supply and demand are instead balanced by changing the number of units in issue on a daily basis. When the share price of an investment trust is trading below its NAV, it is said to be trading at a discount. Conversely, if the investment trust’s share price is above its NAV, it is said to be trading at a premium. The chart and table on the following page should help to illustrate this with a simple example, showing how the share price and NAV of an investment trust interact over time. Put simply, an investment trust’s share price will be influenced by its NAV but over time, for a variety of reasons, it can deviate significantly from it in both directions. ‘THIS COULD, THEREFORE, BE A GOOD TIME FOR INVESTORS TO BE CONSIDERING INVESTMENT TRUSTS AS A BUYING OPPORTUNITY’