Investment Trusts

Getting to grips with discounts and premiums

7 May 2015

Since shares in an investment trust are traded on the stockmarket, the price is based on supply and demand among investors, rather than what the fund’s underlying investments are worth, known as the net asset value (NAV). When the share price is below the NAV, the investment trust is said to be trading at a discount. If the share price is above the NAV, this is known as trading at a premium.

 

Why buy at a discount?

Buying investment trusts at a discount is often seen as a good opportunity for investors, but understanding why a trust is trading at a discount is crucial when deciding whether or not to invest. After all, a ‘good price’ does not necessarily equate with good value. There is no guarantee that any discount will have narrowed – giving you an additional return relative to any movement in the NAV – by the time you come to sell.

The reasons for discounts are varied. A trust that invests in an area that is currently out-of-favour with investors will likely trade at a discount to NAV. Similarly, if a fund manager is underperforming, or investors do not believe in the fund’s longer-term prospects (perhaps due to poor shareholder communication), they might sell their shares.  When supply exceeds demand in the stockmarket, then a discount is likely. If the discount seems disproportionate with the fund’s peer group or growth aspirations, however, then the risk may outweigh the potential reward.

 

Why buy at a premium?

The skill of a fund manager or the growth prospects of an area in which a fund invests can drive investor demand, pushing the share price to a premium over the NAV. The premium is essentially a sign of the market’s faith (sometimes called positive sentiment) in the investment trust’s prospects, which is why some investors are prepared to pay the extra.

If an investment trust is trading at a premium and this increases, you’ll gain an additional return relative to any movement in the NAV. However, if an investment trust is trading at a premium and this decreases, this will have a negative impact on your return relative to any movement in the NAV.

 

Informed decision-making

As with all investment decisions, it is important to be well-informed when looking to buy or sell shares in an investment trust. Fund providers’ websites and factsheets will often provide you with both the NAV and share price information, together with the discount/premium as a percentage.

If you are thinking about making a new investment or changing your investment strategy, speak to your Financial Adviser. If you do not currently have a Financial Adviser, you can find one near you at www.unbiased.co.uk

 

Please remember that the value of investments and the income from them may go down as well as up and you may not get back the amounts originally invested. 

 

Schroders launched its first investment trust in 1924 and our range provides investors with access to a range of nine distinctive investment opportunities including: UK and Japanese equities, Pan-Asian equities and property.

To find out more, please visit www.schroders.co.uk/its

 

Important Information

This article is intended to be for information purposes only and it is not intended as promotional material in any respect.  The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Schroders has expressed its own views and opinions in this document and these may change.  The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Issued in April 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.

Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.