Shares in investment trusts are bought and sold on the London Stock Exchange. Each trust has two prices: the share price, which depends on demand, and the net asset value (NAV), which reflects the value of its assets. Sometimes, trusts trade at a discount or premium to their NAV.
Recently, many investment trusts have started trading at larger discounts than usual. According to AJ Bell, 26 trusts now have discounts more than five percentage points wider than their five-year average. Two trusts, including Syncona, are trading at discounts over 50%. Four others have discounts above 40%.
Buying trusts at a discount can let investors buy assets for less than they are worth. However, it is important to understand why a discount exists. Discounts can happen for many reasons, such as poor market sentiment or a weak performance record. Sometimes, there is a good reason for a trust to keep trading below its NAV.
For example, biotech investment trusts are cheap now because the sector faces tough conditions. High interest rates and uncertainty about US healthcare policy have hurt the sector. Some trusts with private market assets are also discounted because investors worry about the difficulty of selling these holdings.
The Lindsell Train Investment Trust, for instance, is discounted because its recent performance has been weak, even though it once attracted strong demand.
When choosing an investment trust, look beyond the discount. Check the trust’s goals, its assets, the sector outlook, and the manager’s track record. Compare its performance to a benchmark. Remember, buying at a discount does not guarantee a profit. If demand for the trust does not improve, the share price may not rise, even if the NAV does.
Two discounted trusts that may be worth considering are RTW Biotech Opportunities and Baillie Gifford Japan. RTW has outperformed its benchmarks, but its share price is still much lower than its NAV. This could be an opportunity for risk-tolerant investors. Baillie Gifford Japan is also trading at a discount, partly due to a weak yen.
As currency issues fade, the trust’s discount could narrow. The trust focuses on small and mid-sized Japanese companies, many of which are cash-rich and offer good value compared to Western firms.
In summary, while big discounts on investment trusts can look attractive, investors should research carefully before buying.