Investment Trusts are appealing to investors for many reasons not least the opportunities presented by discounted prices.
As the long, dark, Autumn nights draw in and with the consumer spending bonanza that is Christmas nearing the horizon, it will soon be time for the warm-up act - Black Friday.
In a recent study conducted by PwC, the firm forecast UK Black Friday spending to reach £9 billion in 2021, and with a predicted spend of £338, men are expected to be the highest spenders.¹
So as we prepare ourselves for a barrage of TV and targeted digital media advertising, imploring us to grab the discounts on offer and spend, spend, spend, I thought it was an opportune time to talk about discounts of a different nature.
At Church House, when constructing investment portfolios, we use Investment Trusts to complement our own investment funds. In brief, Investment Trusts pool investors' money into a stock market listed vehicle and invest that money into assets, such as other companies listed on the world markets. As the trust is stock market listed, shares that are bought and sold are subject to supply and demand market forces. This mechanism, in part, determines the value of the shares.
As a result, shares can be worth less (discount) or more (premium) than their Net Asset Value (NAV), which is the actual value of the underlying assets and liabilities that make up the trust.
So, in the same way, shoppers might approach Black Friday discounts with some scepticism – researching price history for sale items might well reveal the offer is not attractive as it first seems – we at Church House face the conundrum of evaluating the value of an Investment Trust discounts.
The allure of buying an investment trust at a discount is plain to see – the value of your shares can rise as that discount reduces, without the underlying investments of the trust itself actually appreciating in value. However, the converse can also be true – the value of your shares could fall as the discount widens, without the trust's underlying investments decreasing in value.
Suppose an investment trust is trading at a discount. In that case, the investor is getting exposure to the underlying companies at a discount, e.g. Investment Trust 'A' is trading at a 10% discount and holds Microsoft; therefore, the investor is getting exposure to Microsoft at the cost of 90% of its market value. This even extends to investment trusts holding shares in other investment trusts, whereby there is the possibility of 'double discount' - a Black Friday sounding investment strategy if there ever was one.
Before succumbing to tantalising Black Friday offers, caution and analysis should always be the watchwords. This is also the case in the world of investment trusts; a trust may always be trading at a discount, the current level of discount may be lower than usual, plus how does the trust's discount compare to its peers? Monitoring and analysis, including interaction with management teams, the use of averages and even 'Z' scores – a numerical measurement that describes a values relationship to its mean - are some of the methodologies we apply at Church House to decide when and where to deploy our clients capital.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.