IT - NAV - Discounts & Premiums

[richfool]

I noticed that posters/investors often make reference to either not buying a particular Investment trust because its premium is too high, or to selling one with a high premium and buying an alternative which is trading at a discount. The subject has cropped up recently with both technology trusts and property REIT's.

Whilst I do take note of the various discounts and premiums, I don't usually avoid a trade simply because the trust trading at either a premium or discount, or certainly not because of minor variations. I may well be influenced if it is trading at a very significant premium or discount to its peers, e.g Lindsell Train LTI.

There is a point however, that I wanted to throw into the thinking process, which doesn't seem to get mentioned when posters bring this subject up and I wonder if is perhaps being overlooked. That is: if one trust is at a larger premium to its peers, it may simply be the result of the trust being in greater demand from investors (for whatever particular reasons*), and thus that ought to be viewed as a plus point. The trust on the discount may well be out of favour with the market (for particular reasons*).
(* reasons that we may not be aware of or have considered).

An example that cropped up recently was a suggestion that SMT or Monks be sold because it was trading at a premium, and ATT or PCT being bought instead, as the latter two were trading at discounts. The difference in premiums and discounts obviously could be due to a number of factors, one of which might well be that SMT & Monks are more diversified than the two straight technology trusts which surely represent a greater risk and thus that is reflected in the demand and premiums for the trusts.
At this stage in the cycle I would prefer to hold well diversified trusts.

Example of discussion about premiums & discounts:
viewtopic.php?f=54&t=18060

[monabri]

It may be as simple as familiarity - people have heard of "SMT" (a FTSE100 share) and are perhaps not so au-fait with "PCT"?



SMT Scottish Mortgage Investment Trust
PCT Polar Capital Technology Trust

[monabri]

Talking of premia/discounts - I noted that the Edinburgh Investment Trust plc (EDIN) is currently on a discount to NAV of over 12% - the lowest it has been for 5 years. The indicated dividend yield (Hargreaves) is 4.78%.

[colboy]

Another factor to be considered afaik SMT and other trusts use discount control process. I.e if shares in demand they will issue more shares onto the market to control the premium. FGT another large trust also does this.

[Dod101]

Talking of premia/discounts - I noted that the Edinburgh Investment Trust plc (EDIN) is currently on a discount to NAV of over 12% - the lowest it has been for 5 years. The indicated dividend yield (Hargreaves) is 4.78%.

Yes. By the lowest you mean I think that the discount seems to put it into bargain territory. Thanks to an abysmal three years or so I guess people are selling irrespective. I am seriously thinking of selling, having held it since about 1995. AGM is next week but unfortunately I cannot attend. It is an example of a trust that you should not be tempted to buy simply because of the discount or high(ish) yield. It is a UK facing income trust and is suffering the same problems that HYPers face as far as capital values is concerned.

I though do take the thrust of what the OP is saying. Trading ITs on the basis of their discount or premium is no good for an LTBH investor. I guess if you are a trader it is different. For ITs that are producing the goods, I simply ignore the premium or discount and let them run, Scottish Mortgage being a case in point, as is Finsbury Growth and Income.

Dod

[Alaric]

Trading ITs on the basis of their discount or premium is no good for an LTBH investor.

From that viewpoint, the decision of some ITs to issue new shares when demand creates a premium and to cancel shares in response to a discount, has to be welcomed. You can regard them as more akin to OEICs and ETFs trading at market value.

Where the IT holds unquoted assets, the discount or premium is also the opinion of the market on the value of the unquoted stuff where this differs from the IT's own estimate.

[Avantegarde]

The OP is entirely right. If an IT trades at a premium it is a reflection of supply and demand - is it popular? And that is often heavily influenced by the marketing carried out by investment companies.