Here on The Value Perspective we steer clear of making forecasts on the not unreasonable grounds that it is impossible to predict the future. As we have argued in articles such as Polls apart, if those who are supposed to forecast for a living – whether it be weather, sport, politics, economics or whatever – are unable to pull off the trick on a consistent basis, then why should we believe ourselves any different?
But we do like to offer the occasional warning to our visitors and often this will stem from the area of value investing that suggests, on average, some actions will play out very badly indeed. So it was, almost exactly two years ago, when we argued in Premium bind that investors should think long and hard before buying any closed-end fund that is trading at a premium to its net asset value (NAV).
What had particularly caught our eye about the closed-end arena is that, while the great majority of these funds usually trade at a discount to their NAV, at that point a number of high income vehicles were standing on premiums of 20% or more. We then picked out four of the very highest flyers and illustrated their premium/discount history over the preceding decade in the following chart.
“Investors do, however, need to tread carefully,” we continued. “Here on The Value Perspective, just as we can grow very excited when we see £1 of assets costing less than a pound, we can grow very nervous when we see £1 of assets costing more than £1. Whether that sets off your own warning bells is up to you …” Now take a look at how that same chart updates two years down the line.
All four funds have seen their premiums narrow significantly – and indeed two have moved to a discount. Yet it is the recent fortunes of the trust that remains on the highest premium that particularly interests us here. Clearly, when we wrote Premium bind, we had no idea such a high-profile manager would leave the fund but the fact that he did underlines a key strength of value investing.