Why are ITs at such big discounts?

[Urbandreamer]

But they are also buying back shares, presumably because they believe the share price is much too low and doesn't reflect the true value of the company. This feels like a good sign to me, but who knows?

As for IT's being a flawed product - if they have been around, and largely successful, for >100 years, there can't be much wrong with them!...and a good few have.

Buying back shares improves liquidity for sellers but does it bring enough new buyers in to the market to solve the problem being addressed by the buy back? I’ll guess no.
The horse and cart was good for hundreds of years until products more suited to some circumstances came along.
Do we have any history of long term trends of how premium/discounts have been?

Buy backs are not usually done to improve "liquidity". You can only buy a given share once. The following day you need to buy another share to add to it if you are to attempt to increase "liquidity". Oh and possibly sell them as well, though that is usually done when the shares trade on a premium.

Share buy backs are done, as they are with any company, because the management feel that the best use of any cash is to buy their own shares.
Given that you may be able to buy £1.32 worth of assets for £1.02, you can understand the argument.

FWIW I had a colleague who just couldn't get his head around this aspect of investment trusts and chose to avoid them.

Oh and as yet people haven't stopped using their legs, which they were doing long before they harnessed horses. As spurious an argument as your own.

[Wuffle]

People, despite clinging to the delusion that they are logical, are in fact emotionally driven with a sheen of logic.
The market is made up of people, so has a considerable emotional element.
Premia and discounts reflect that.
The dot com bubble was euphoric b*locks, some of the darkest discounts will be similar.
Layered on this is the ownership profile for stocks, conservative, risk averse older people.

But you all know this (deep down).

W (fan of the well timed buy back).

[Mememe]

I had a meeting this week to specifically discuss investment trusts with an investment management company. To give a slightly more industry view on it:

From a risk perspective gearing/premiums/discounts make ITs more difficult to risk rate than an OEIC. Therefore they often aren’t risk rated by the main risk analyst companies (which are used in the industry but unlikely to be a concern for retail investors), meaning they often don’t feature on the buy lists of investment management/wealth management/financial advice companies. This reduces the number of big buyers for ITs. With more and more regulation, it makes it more difficult for the professional end of the market to use them.

It was discussed but there wasn’t evidence for it, but the general feeling was that there’s more retail money in investment trusts (based on point1) than other investment industry sectors and so the sector is more prone to sentiment than it otherwise might which impacts discounts

Obviously rates mean the risk free return looks more attractive so there are less buyers. Alts make up almost half the sector, much of which is based around income producing assets. If the risk free rate is far higher than it previously was then these assets are going to be less in favour than they were (property/infrastructure), income yields need to rise to meet this issues and so it pushes discounts

A personal view, which isn’t backed up by any evidence but just anecdotal, but younger investors are more likely to go to etf’s and trackers than older investors

As has been mentioned the cost of gearing is now higher and so gearing may now not be such an advantage as it has been post 08.

[JohnW]

‘People, despite clinging to the delusion that they are logical, are in fact emotionally driven with a sheen of logic.
The market is made up of people, so has a considerable emotional element
Premia and discounts reflect that.’

ETF’s don’t have premia or discounts more than a few dozen basis points I think. Thus, the folk who buy ETF’s are very different from those who buy IT’s with respect to the thinness of their logic sheen? Seems unlikely that there are two such different types of investors.

With more and more regulation, it makes it more difficult for the professional end of the market to use them.

‘However, he says that another reason (for big discounts) is that ongoing charges disclosures are penalising the use of investment companies.
This headwind refers to changes to the rules around how investment companies report fees, which is having knock-on effects for wealth managers which own investment trusts in client portfolios and have to update their overall fund fees.’ https://www.ii.co.uk/analysis-commentar ... w-ii529114

That sounds like investors are less impressed with the product now they’ve had some fees disclosed for the first time. Which sounds like a flaw that’s been fixed.

Risk free rate considerations apply similarly to ETF’s. I don’t think it explains discounts if ETF’s don’t have discounts that big.

[GoSeigen]

But they are also buying back shares, presumably because they believe the share price is much too low and doesn't reflect the true value of the company. This feels like a good sign to me, but who knows?

Quite the opposite surely? Why would shareholders approve shares being bought off them at a price which is "much too low"?

Look at the price movement while holders have been selling their shares -- down. That tells me the price was high enough to encourage holders to sell and that the subsequent price correction is to be expected.



Could never understand why people see buybacks as a good sign... for me its a signal to be less bullish.


GS

[scrumpyjack]

But they are also buying back shares, presumably because they believe the share price is much too low and doesn't reflect the true value of the company. This feels like a good sign to me, but who knows?

Quite the opposite surely? Why would shareholders approve shares being bought off them at a price which is "much too low"?

Look at the price movement while holders have been selling their shares -- down. That tells me the price was high enough to encourage holders to sell and that the subsequent price correction is to be expected.



Could never understand why people see buybacks as a good sign... for me its a signal to be less bullish.


GS

In the case of an IT buying back shares at a discount automatically increases the NAV of the remaining shares and so can be considered beneficial to shareholders.

[JohnW]

Still feeling my way. Does the buy back increase the NAV or simply increase the price but leave the NAV unchanged? I thought the NAV was the total value of the underlying assets and liabilities; and I thought they wouldn’t change just because the price of the stock rose or fell. Struggling here.

[scrumpyjack]

Still feeling my way. Does the buy back increase the NAV or simply increase the price but leave the NAV unchanged? I thought the NAV was the total value of the underlying assets and liabilities; and I thought they wouldn’t change just because the price of the stock rose or fell. Struggling here.

.

If the IT buys back shares at a discount the net asset value of the remaining shares increases.

eg shares in issue 100m
Value of assets - liabilities £100m = NAV 100p per share
Quoted share price 70p (30% discount)

Buyback 10% of the shares 10m shares at 70p cost £7m
Value of assets - liabilities now £93m
Shares in issue 90m

NAV is now 103.33p per share

[jaizan]

ITs offer the opportunity of discounts. Of course, discounts widen when markets fall and narrow when markets rise. But as we're all supposed to try & buy cheap, this seems like a very good thing.

As someone already pointed out, buying an IT at a discount results in a larger yield.

ITs don't have to worry about the liquidity of what they buy, as there is no risk of redemptions.

[JohnW]

Thanks for the NAV stuff.

‘ITs offer the opportunity of discounts. Of course, discounts widen when markets fall and narrow when markets rise. But as we're all supposed to try & buy cheap, this seems like a very good thing’

IT’s will be good investments, or not so good, but what you’re describing is akin to buying dollars when the $US has fallen against the pound, and then selling when it rises, ie speculating on currency movements since the widely held view is that such currency fluctuations even out over time without nett gain. Just as the IT’s discount/premium shows no net appreciation over time (I’m guessing); which is why I asked for any chart history of that. The assets in the IT will pay interest or generate dividends, which sounds like investing, but the discount aspect of ‘buy low’ is speculation I think. But then you’ve seen I’m a bit rusty on IT’s.

[Itsallaguess]

‘ITs offer the opportunity of discounts. Of course, discounts widen when markets fall and narrow when markets rise. But as we're all supposed to try & buy cheap, this seems like a very good thing’

IT’s will be good investments, or not so good, but what you’re describing is akin to buying dollars when the $US has fallen against the pound, and then selling when it rises, ie speculating on currency movements since the widely held view is that such currency fluctuations even out over time without nett gain.

Just as the IT’s discount/premium shows no net appreciation over time (I’m guessing); which is why I asked for any chart history of that. The assets in the IT will pay interest or generate dividends, which sounds like investing, but the discount aspect of ‘buy low’ is speculation I think. But then you’ve seen I’m a bit rusty on IT’s.

In the majority of cases regarding IT's and their potential discounts, your 'currency-speculation' dollar analogy is wrong, and I'll try to explain why...

Broadly, Investment Trusts contain underlying investment-components that are themselves priced by the market at any given time as individual investments, and the collective value of all those underlying investments, as well as taking into account things like IT debt and loans, is then attributed to the NAV calculation of the IT.

If we ignore the IT debt and loans aspects for now, and concentrate on the package of underlying, individually-priced investments, then if we relate back to a 'dollar' based analogy, an IT trading on a discount is really more aligned with one where the underlying investments are 'boxes of dollars' that all add up to a certain value themselves, but where the overall package of IT-held boxes is trading at a price that's out of step to the number of dollars inside them...

The key thing here is that in the majority of cases in IT discount situations, everything is still 'dollars', but the ones inside the boxes that the IT own are being priced differently to the ones that are available outside the IT...

The above is in some ways a simplistic explanation, because there are also other aspects that might influence the price of an overall IT, and hence the discount or premium being attributed against it's underlying NAV, such as management reputation or prospects, the amount of gearing (borrowing) being used with an IT, and sometimes elements of underlying IT holdings that are often difficult or even impossible to gather 'external valuation' comparisons against, and those aspects do then sometimes blur things a little when trying to properly assess the overall investment value of some IT holdings in relation to a potential NAV-based premium or discount, but in general terms regarding the majority of IT's which might broadly hold collections of normally-accessible individual market-investments, then the above 'boxes of dollars' analogy is much more appropriate than trying to inject 'currency speculation' descriptions into any NAV-discount conversations...

There's a good guide here that explains the basics around Investment Trust NAV discounts and premiums, which hopefully aligns with the above 'boxes of dollars' analogy -

https://www.invesco.com/uk/en/investment-trusts/invesco-insights/investment-trusts-discounts-and-premiums-explained.html

Cheers,

Itsallaguess

[Dod101]

Buying back IT shares at a discount is not I think intended to improve liquidity for anyone but they do marginally improve the NAV for continuing shareholders which is one real positive. Usually the intention is I think simply to try to balance demand and supply because for the long term holder it makes no difference if there is a discount to NAV or not.
At the risk of repeating myself, ITs are at a discount to NAV because a) confidence in the NAV may not be very high or b) there are more sellers than buyers
Dod

[Urbandreamer]

Thanks for the NAV stuff.

‘ITs offer the opportunity of discounts. Of course, discounts widen when markets fall and narrow when markets rise. But as we're all supposed to try & buy cheap, this seems like a very good thing’

IT’s will be good investments, or not so good, but what you’re describing is akin to buying dollars when the $US has fallen against the pound, and then selling when it rises, ie speculating on currency movements since the widely held view is that such currency fluctuations even out over time without nett gain. Just as the IT’s discount/premium shows no net appreciation over time (I’m guessing); which is why I asked for any chart history of that. The assets in the IT will pay interest or generate dividends, which sounds like investing, but the discount aspect of ‘buy low’ is speculation I think. But then you’ve seen I’m a bit rusty on IT’s.

Itsallaguess has given a good explanation of what is wrong with your view, but I think that you should consider WHY it is wrong rather than what is wrong with it.

Basically this is where your problem with investment trusts resides. You imagine or want them to be something other than they are. indeed I'm slightly concerned and convinced that the same issue may affect your view of other "investments".

They are NOT money and money is not what you think that it is. You exchange your labor for a token, which you can exchange for other things like food, someone else's labor, or can chose not to spend. If you have a surplus of tokens you can bury them in the garden, hide them under the bed or pay someone to look after them for you. But as we all know keeping them is a bad idea.

So what many on TLF do is buy what they consider "real" assets with their tokens. Alternatively they may buy part of a company in the belief that it will continue to be or become productive, returning them more tokens. This is totally different from swapping one token for another.

On this board we consider buying collections of such companies, officially as Unit Trusts or Investment Trusts but in fact also other such collections like ETF's.

NON of these things are "money" and all of them are "worth" either what someone else will give you for them or their value to you.

Note that there were two examples of worth in that last sentence. The latter half explains why some may be willing to pay a premium or sell at a discount. Be it for a "work of art" or shares in an investment trust.

I'm sorry I can't find any easily accessible long term record or chart of how average premium and discounts apply.
What you can do is visit this site and check the chart of an individual investment trust.
https://www.theaic.co.uk/companydata/re ... erformance

I had a quick look at trig and as you will see, of the last 10 years, it was selling at a premium for about 8 of them.
Note that this is not a recommendation, it's just an IT that I own.

[funduffer]

I had a meeting this week to specifically discuss investment trusts with an investment management company. To give a slightly more industry view on it:

From a risk perspective gearing/premiums/discounts make ITs more difficult to risk rate than an OEIC. Therefore they often aren’t risk rated by the main risk analyst companies (which are used in the industry but unlikely to be a concern for retail investors), meaning they often don’t feature on the buy lists of investment management/wealth management/financial advice companies. This reduces the number of big buyers for ITs. With more and more regulation, it makes it more difficult for the professional end of the market to use them.

It was discussed but there wasn’t evidence for it, but the general feeling was that there’s more retail money in investment trusts (based on point1) than other investment industry sectors and so the sector is more prone to sentiment than it otherwise might which impacts discounts

Obviously rates mean the risk free return looks more attractive so there are less buyers. Alts make up almost half the sector, much of which is based around income producing assets. If the risk free rate is far higher than it previously was then these assets are going to be less in favour than they were (property/infrastructure), income yields need to rise to meet this issues and so it pushes discounts

A personal view, which isn’t backed up by any evidence but just anecdotal, but younger investors are more likely to go to etf’s and trackers than older investors

As has been mentioned the cost of gearing is now higher and so gearing may now not be such an advantage as it has been post 08.

I once had an interesting discussion with my sister's financial advisor on IT's. Her attitude was exactly as you have described - " they are too risky", "they borrow money to invest" etc..

My sister is looking for an income and I had suggested a couple of high yield IT's with a very long dividend record with no cuts, and low costs. She couldn't accept that this was a sensible way to generate an income and pushed towards a fairly high cost fund, no doubt with higher fees to herself.

It wasn't my place to over-rule her, but it was illuminating.

FD

[ADrunkenMarcus]

I once had an interesting discussion with my sister's financial advisor on IT's. Her attitude was exactly as you have described - " they are too risky", "they borrow money to invest" etc..

My sister is looking for an income and I had suggested a couple of high yield IT's with a very long dividend record with no cuts, and low costs. She couldn't accept that this was a sensible way to generate an income and pushed towards a fairly high cost fund, no doubt with higher fees to herself.

It wasn't my place to over-rule her, but it was illuminating.

FD

I think 'depressing' rather than illuminating - but certainly a mix of both!

There are some things we can control as investors and some things we cannot. Fees are one of them we can control.

I don't think people realise just how corrosive it is to be paying 1 - 1.5 percent in platform fees, fund management fees or whatever over a sustained period of time. If we assume equities return about 5 percent a year in real terms, on average, then losing 1 - 1.5 percent means you're forfeiting equivalent to about 20 to 30 percent of an annual return.

Best wishes


Mark.

[kempiejon]

So this has got me thinking that goes a bit like this. For a few years I have been looking at the FTSE250 as an interesting market to shop. I have found some interesting propositions and been making money. I have read about ITs and even bought a couple but it's not really been my thing. I have CTY as a comparator for my HYP and Murray International for global cover though I prefer ETFs for collectives these days. I also have a REIT or two in my HYP and a couple of the green infrastructure funds.
If many ITs are at a larger than average discount and the FTSE250 index has a large proportion of ITs - something like 35% in investment vehicles and real estate investment trusts - hence the FTSE250 index is near a 10 year low this might be a time for me to look at a FTSE250 ETF to collect all the boats in that particular harbour without needing to spend to much time on research.
I get that perhaps ITs are fairly priced and the discount to NAV is a mispricing of the underlying assets the IT holds and the discount might be unrealistic.
My other inkling is that the FTSE250 is let's not change horses in mid stream. The 250 is very UK centric - except a few international ITs - the UK is stuffed and the long term decline in the index is a harbinger of the inevitable and the only way to make money from the smaller UK index is my current method of looking for unloved growth prospects.

[stacker512]

My sister is looking for an income and I had suggested a couple of high yield IT's with a very long dividend record with no cuts, and low costs. She couldn't accept that this was a sensible way to generate an income and pushed towards a fairly high cost fund, no doubt with higher fees to herself.

Most ITs seem to have high costs (even though my ISA is all in ITs), compared to Index funds.
Would Index funds have been more appropriate for your sister? (or did she also need the income?)

I've not been in the investing world very long, but my feel is that
- ITs are (relatively) expensive and (generally) provide larger yields
- Index funds provide lower yields but much cheaper costs.

There is not much in-between? Is that where HYPs fit in?

[simoan]

Looking at my portfolio of 14 IT's, 13 are at discounts, the highest being GCP Infrastructure at 43%!

I can understand that an IT with high gearing may be more vulnerable to high interest rates, but is this really the only reason, or are IT's really just out of favour?

If out of favour.....maybe a good time to buy!

FD

I confess I’ve only ever held three Investment Trusts, one of which is/was a special situation (FEET), however I am really attracted to the discounts on offer currently, particularly where the NAV is easily marked to market i.e. large cap listed equities. I would be far more suspicious of REIT’s and Infrastructure Trusts where the NAV is based on a DCF calculation - who knows what discount rate should really be used by the valuer in these cases? And of course, most are riddled with debt that will need to be rolled over at higher interest rates in the future. So some of the large discounts are understandable in that respect.

I think you also have to remember that even some of the largest IT’s do not see much trade volume each day relative to their size, and so a relatively small amount of selling can disproportionately hit the share price. For that reason, I don’t overly concern myself with the reasons for a discount because like any other company that is trading at a discount to its net assets, it is just a mechanism for transferring wealth from the impatient to the patient. And I’m prepared to be patient where I like the underlying companies held by the IT e.g. I really like the current valuations of Diageo, London Stock Exchange, RELX and Burberry on a longer term view, so why not gain exposure by buying Finsbury Growth and Income on a 6% discount? Not something I’ve done yet but a question I keep asking myself…

[LooseCannon101]

Here is Warren Buffett's opinion of share buybacks -

https://apnews.com/article/warren-buffe ... 2c3ac7ab97

I agree with ScrumpyJack that buybacks for investment trusts trading at a substantial discount e.g. 10%+ can only be good news for long-term shareholders.

[yieldhog]

I agree with ScrumpyJack that buybacks for investment trusts trading at a substantial discount e.g. 10%+ can only be good news for long-term shareholders.

Unfortunately that's not always the case as the following illustrates:
I bought VSL a couple of years ago at a price about 92 and yield around 10%. I bought as a long-term investment and was quite relaxed about seeing the price decline as interest rates began to rise. I assumed that as interest rates peaked and eventually eased somewhat then the price of VSL would improve. As a short duration portfolio, VSL also had an opportunity to lock in some higher yielding investments
Fastforward to this year and the VSL fund managers are now liquidating the whole portfolio and repaying investors. The VSL NAV is currently about 92, roughly what I paid. If they managed to sell instantly without costs then in theory I might come close to getting back what I paid. However, the process is likely to take a few years, during which time the market might change and the liquidity of VSL will decline and probably disappear altogether. I will also lose a 10% yielding IT that I will want to replace.
I also have another IT that is doing the same thing and I will probably lose out on that one as well.

So not always a good thing. Buyer beware.

Y