Discounts and premiums
The net asset value, or NAV as it is referred to, is simply the value of an investment trust’s assets minus any liabilities such as debt.
Once this is understood, the idea of discounts and premiums in relation to investment trusts is a much easier concept to apply.
James Carthew, head of research at QuotedData, explains: “In simple terms, the NAV is the same as a unit trust price and the discount is the difference between that value and the market’s perception of that value.
“A positive number means the trust is trading at a premium to its net asset value and a negative number means it is trading below it.”
But he adds: “We would acknowledge though that, like any industry, there is a certain amount of technical jargon to get your head around.”
The reason an investment trust might move to a discount is due to negative sentiment towards it, or to a premium if the trust is popular.
Ms Brodie-Smith uses an example: “An investment company with £100m of net assets and 100m shares would have a net asset value per share (NAV/share) of 100p.
“If the share price was 90p, it would be trading at a discount of 10 per cent. If the share price was 110p, it would be trading at a premium of 10 per cent.”
Investment trusts can move from a discount to a premium fairly quickly, or they might stay above or below their net asset value for some time.
It is also common for a whole sector to trade at a discount if it is out of favour.
Putting it into practice
Mr Yousefian explains what this means when an investor goes to buy a closed-ended fund.
“This means you are sometimes paying a bit more for a share in a trust or you could be getting a 'bargain'.
“However, while the January sales may only last for a few weeks, some trusts can trade for very long periods at a discount or a premium and the price may not trade at its net asset value.”
There is such a thing as a zero discount policy which, as the name suggests, means the investment trust takes steps to avoid trading at a discount to its net asset value.
Those trusts which adopt a zero discount policy “will issue or buy back as many shares as necessary to keep the share price trading close to asset value”, says Mr Carthew.
