Beginner's question about Premium/Discount

[csearle]

Please excuse the beginner's question. If an IT is available at a discount, I presume this is much like a normal company available to buy for less than the assets it owns. So is it generally better to go for a discount (cheap) or premium (expensive) IT? I imagine that the market presumes that ITs available at a premium have some other qualities.

What do you guys do?

Thanks,
Chris

[BullDog]

You're right.

I don't buy at a premium to NAV. Some are happy to do so.

[Alaric]

I imagine that the market presumes that ITs available at a premium have some other qualities.

It's sometimes just down to excess demand driving up the price. Some ITs now attempt to manage their premiums and discounts by buying back shares to cancel when there's a discount and issuing new ones when there's a premium. For ITs where there's a similar or parallel OIEC, this practice would attempt to keep the prices movements in tamdem.

Some ITs operate in market sectors where there's no reliable up to date NAV. Buyers and sellers may then have their own views about the worth or otherwise of the IT's assets.

[Dod101]

To me it is clearly better to buy at a discount if you can but sometimes you will wait a long while for a discount to appear. Buying an IT at a premium will also of course reduce the yield at purchase so in all it is not usually a very good idea.

If I like an IT I will sometimes just buy it anyway, but it is often worthwhile to wait and then pounce if it has fallen out of favour but the bottom line is that there is no hard and fast guidance available.

Dod

[Darka]

I prefer not to buy anything at a premium, including Investment Trusts.

Too big a discount might be a red flag too however.

[Spet0789]

Another point to bear in mind is the nature of the assets. A trust like CTY holds liquid, listed shares, so its NAV is a very accurate valuation of its assets.

Contrast with trusts like RGL (offices) or UKW (wind farms). The NAV of the former is calculated based on purchase price or most recent appraised value of the properties. The NAV of the latter is calculated based on various assumptions about future power prices, discounted at a fairly arbitrary cap rate.

For trusts like these with subjective or lagging NAVs, an apparent premium or discount could reflect the market’s view that the NAV does not reflect the true value of the assets.

[Dod101]

Another point to bear in mind is the nature of the assets. A trust like CTY holds liquid, listed shares, so its NAV is a very accurate valuation of its assets.

Contrast with trusts like RGL (offices) or UKW (wind farms). The NAV of the former is calculated based on purchase price or most recent appraised value of the properties. The NAV of the latter is calculated based on various assumptions about future power prices, discounted at a fairly arbitrary cap rate.

For trusts like these with subjective or lagging NAVs, an apparent premium or discount could reflect the market’s view that the NAV does not reflect the true value of the assets.

Quite true and a point often forgotten. How accurate is the valuation of the net assets in the first place?

Dod

[mc2fool]

Please excuse the beginner's question. If an IT is available at a discount, I presume this is much like a normal company available to buy for less than the assets it owns. So is it generally better to go for a discount (cheap) or premium (expensive) IT?

Neither. What you have to try and do is figure out if the discount/premium is justified, and if so to what degree.

The idea of getting something at a discount sounds instinctively appealing but a discount could indicate that the market thinks the IT will be offering crap returns for the foreseeable future. Not much point in buying at a discount if the price is going to go down.

Similarly a premium may indicate that the market thinks the IT will be offering good returns, which you may miss out on if you just avoid those ITs as a matter of religion. Infrastructure and renewable ITs have been at a premium, as a group, for some years.

So, it's a matter of first looking at if there are macro reasons that might be affecting the discount/premium of the sector and then factors that could be affecting the individual IT.

One thing you can do, although it doesn't tell you the "why", is look at how the discount/premium is compared to it's historical record. This is quantified in what's called the IT's Z-score, which you can find plenty written about on the net, e.g. https://www.itinvestor.co.uk/2018/07/should-you-use-z-scores/.

However, while the likes of CityWire and the IC occasionally have articles on "cheapest and most expensive" ITs based on Z-score, unfortunately AFAIAA there doesn't seem to any source that lists them for any IT on a daily basis. Morningstar used to publish the 1 year Z-score on their info pages for each IT but I can't see it there any more.

What you can do is look at the discount chart below the main chart on the AIC's performance page for an IT and eyeball whether the discount/premium is low or high historically, e.g. https://www.theaic.co.uk/companydata/SMT/performance

But as I say, that doesn't tell you why it's so, nor if the share price is going to go up or down ...

[Itsallaguess]

What you can do is look at the discount chart below the main chart on the AIC's performance page for an IT and eyeball whether the discount/premium is low or high historically,

e.g. https://www.theaic.co.uk/companydata/SMT/performance

For Investment Trusts that might not be covered by the AIC site, there's also a useful 'Premium / Discount History' chart available on the Trustnet site as well, which can be set to show a number of different time periods up to a maximum of five years.

Example shown below for Scottish Mortgage (5-year) -



Link below for the Trustnet page for Scottish Mortgage, showing the above 'Premium / Discount History' chart -

https://www.trustnet.com/factsheets/t/be08/scottish-mortgage-investment-trust-plc

Cheers,

Itsallaguess

[UncleEbenezer]

Example shown below for Scottish Mortgage (5-year) -

Bear in mind, Scottish Mortgage has a history of actively managing discount/premium by buying its own shares at a discount and issuing new equity at a premium. In the Good Times there were often multiple RNS notices per week about issuing new equity to prevent a substantial premium growing.

Not all ITs do that. Hence the much bigger premia and (especially) discounts sometimes seen.

[LittleDorrit]

1 year z scores are listed on Morningstar on a daily basis at the bottom of table 5, "valuation statistics" for each individual trust.
They can be scraped into a spreadsheet with an interogative expressions such as :-

= index(ImportHTML("http://tools.morningstar.co.uk/uk/cefreport/default.aspx?SecurityToken=E0GBR00QXG]2]0]FCGBR$$ALLL","table",5),6,2)

Daily tables can also be found by signing onto the Numis site and going to the table of "Movers and Cheap/Dear".

For beginers citywire usually publish an article each Friday evening with a commentary on notable changes in the discount regime that week.

https://citywire.com/investment-trust-i ... lysis_list

[mc2fool]

For Investment Trusts that might not be covered by the AIC site, there's also a useful 'Premium / Discount History' chart available on the Trustnet site as well, which can be set to show a number of different time periods up to a maximum of five years.

Yes, thanks, that's useful too ... although I notice that for ITs that don't subscribe to Trustnet, like e.g. Lindsell Train (which also doesn't subscribe to the AIC) there is no premium/discount chart in the Overview tab. However, there is still the bigger one in the Performance tab. (Now there's an IT with a rollercoaster premium!) https://www.trustnet.com/factsheets/t/lb04/lindsell-train-it-plc

1 year z scores are listed on Morningstar on a daily basis at the bottom of table 5, "valuation statistics" for each individual trust.
They can be scraped into a spreadsheet with an interogative expressions such as :-

= index(ImportHTML("http://tools.morningstar.co.uk/uk/cefreport/default.aspx?SecurityToken=E0GBR00QXG]2]0]FCGBR$$ALLL","table",5),6,2)

Aha! Now that's the old format Morningstar pages for an IT that I remember. But how did you get there? If I start at the Morningstar home page and stick TRY into their search and select the IT it gives me https://www.morningstar.co.uk/uk/report/cef/quote.aspx?t=E0GBR00QXG

Daily tables can also be found by signing onto the Numis site and going to the table of "Movers and Cheap/Dear".

Are you talking about https://funds.numis.com/? 'Cos Login there says "If you are not a subscriber and represent an Institution with which Numis has a current client agreement and wish to subscribe, you can register here" and registration requires a company name and a corporate email address.

[LittleDorrit]

m2,
Think that I signed onto Numis on this page with just an email address (but a long time ago) :-
https://www.numiscorp.com/x/ic-research.html

[Itsallaguess]

1 year z scores are listed on Morningstar on a daily basis at the bottom of table 5, "valuation statistics" for each individual trust.

They can be scraped into a spreadsheet with an interogative expressions such as :-

= index(ImportHTML("http://tools.morningstar.co.uk/uk/cefreport/default.aspx?SecurityToken=E0GBR00QXG]2]0]FCGBR$$ALLL","table",5),6,2)

Aha! Now that's the old format Morningstar pages for an IT that I remember. But how did you get there?

If I start at the Morningstar home page and stick TRY into their search and select the IT it gives me https://www.morningstar.co.uk/uk/report/cef/quote.aspx?t=E0GBR00QXG

The first URL given by LittleDorrit contains the unique Morningstar code for TRY, which you can see occurs before the ']2]' section of the URL.

To get to the same format of page containing the z-score for other IT's, it's just a case of substituting the relevant Morningstar IT code into the same URL.

We can see this in the second URL you've posted, where the final unique code for TRY (E0GBR00QXG) can be seen in the original URL, sitting before the ']2]' section.

To find other unique Morningstar codes for different IT's, the link below contains a full list of IT names with underlying URL hyperlinks, which then individually disclose the relevant Morningstar codes, and those can be used to access the z-score page helpfully provided by LittleDorrit -

https://www.morningstar.co.uk/uk/screener/cef.aspx#?filtersSelectedValue=%7B%7D&page=1&perPage=500&sortField=yield_M12&sortOrder=desc

Cheers,

Itsallaguess

[mc2fool]

m2,
Think that I signed onto Numis on this page with just an email address (but a long time ago) :-
https://www.numiscorp.com/x/ic-research.html

Methinks you may have been lucky. The Next page requires name, company, address & phone and for you to agree with the regulatory T&Cs at https://www.numis.com/legal-and-regulatory !

[mc2fool]

1 year z scores are listed on Morningstar on a daily basis at the bottom of table 5, "valuation statistics" for each individual trust.

They can be scraped into a spreadsheet with an interogative expressions such as :-

= index(ImportHTML("http://tools.morningstar.co.uk/uk/cefreport/default.aspx?SecurityToken=E0GBR00QXG]2]0]FCGBR$$ALLL","table",5),6,2)

Aha! Now that's the old format Morningstar pages for an IT that I remember. But how did you get there?

If I start at the Morningstar home page and stick TRY into their search and select the IT it gives me https://www.morningstar.co.uk/uk/report/cef/quote.aspx?t=E0GBR00QXG

The first URL given by LittleDorrit contains the unique Morningstar code for TRY, which you can see occurs before the ']2]' section of the URL.

To get to the same format of page containing the z-score for other IT's, it's just a case of substituting the relevant Morningstar IT code into the same URL.

We can see this in the second URL you've posted, where the final unique code for TRY (E0GBR00QXG) can be seen in the original URL, sitting before the ']2]' section.

To find other unique Morningstar codes for different IT's, the link below contains a full list of IT names with underlying URL hyperlinks, which then individually disclose the relevant Morningstar codes, and those can be used to access the z-score page helpfully provided by LittleDorrit -

https://www.morningstar.co.uk/uk/screener/cef.aspx#?filtersSelectedValue=%7B%7D&page=1&perPage=500&sortField=yield_M12&sortOrder=desc

Cheers,

Itsallaguess

Well blimey mate! Talk about convoluted!

As it turns out the new format pages do have the Z-scores ("1-Year Z-Statistic"), right up there in the block of figures at the top. Indeed, more prominently than the old format pages. Mea culpa. Should have gone to Specsavers.

[fisher]

The youinvest research pages use the Morningstar data rebadged and might be an easier way to access what you want.

E.g. https://www.youinvest.co.uk/market-research/LSE:TRY

[monabri]

Good stuff from above posts. mc2fool has said what I was going to say.

It might be worth looking at a few ITs on a historical basis ( 1 yr , 5 yr) and reviewing their discount/ premium history and then trying to understand or explain why any discount/premium has changed. No real advantage in looking at a number at one point in time.

[DavidM13]

The first URL given by LittleDorrit contains the unique Morningstar code for TRY, which you can see occurs before the ']2]' section of the URL.

To get to the same format of page containing the z-score for other IT's, it's just a case of substituting the relevant Morningstar IT code into the same URL.

We can see this in the second URL you've posted, where the final unique code for TRY (E0GBR00QXG) can be seen in the original URL, sitting before the ']2]' section.

To find other unique Morningstar codes for different IT's, the link below contains a full list of IT names with underlying URL hyperlinks, which then individually disclose the relevant Morningstar codes, and those can be used to access the z-score page helpfully provided by LittleDorrit -

https://www.morningstar.co.uk/uk/screener/cef.aspx#?filtersSelectedValue=%7B%7D&page=1&perPage=500&sortField=yield_M12&sortOrder=desc

Cheers,

Itsallaguess

Well blimey mate! Talk about convoluted!

As it turns out the new format pages do have the Z-scores ("1-Year Z-Statistic"), right up there in the block of figures at the top. Indeed, more prominently than the old format pages. Mea culpa. Should have gone to Specsavers.

You can get 1y Z-statistic on the daily Morningstar factsheets on the AIC company profile page of each investment company. example here.

https://www.theaic.co.uk/companydata/sc ... /documents

then

https://lt.morningstar.com/fav18yujpm/c ... E0GBR00R1S

[midgesgalore]

Please excuse the beginner's question. If an IT is available at a discount, I presume this is much like a normal company available to buy for less than the assets it owns. So is it generally better to go for a discount (cheap) or premium (expensive) IT? I imagine that the market presumes that ITs available at a premium have some other qualities.

What do you guys do?

Thanks,
Chris

Chris
I do all of the above thread replies for premium / discount.
Naturally I prefer a discount and will tolerate a very small premium however I always check a graph of the premium / discount to see how it has varied over time.
I never like to buy an IT with a NAV of less than £100 Million nor do I like to buy a trust with a continuation vote every few years.
My personal choices.


midgesgalore