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Don’t let discounts control what you buy

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Don’t let discounts control what you buy – James Carthew is quoted in this article by Leonora Walters

The prices of investment trusts’ shares do not always reflect the value of their assets, meaning these can trade at discounts or premiums to their net asset value (NAV) – ie cost more or less than their assets. So some trusts’ boards try to limit the amount by which the share price differs from the NAV via what are known as discount control mechanisms.

Around 60 out of the roughly 400 investment trusts listed in the UK have an explicit discount target, according to broker Winterflood. One of the most common ways to try to stick within it is to buy back the trust’s shares when it hits a certain level of discount, and issue shares when it hits a certain level of premium, typically between 0 and 12 per cent. Some of these targets are implemented strictly, and some are only triggered if the discount exceeds the target for a period of time.

Personal Assets Trust (PNL), for example, tries to ensure that its shares always trade close to NAV with share buybacks at a small discount to NAV and issues of shares at a small premium when demand exceeds supply. As a result the trust fairly consistently trades at a slight premium.

Boards also try to control discounts by offering shareholders the opportunity to sell their shares back to the trust at regular intervals or under certain conditions. For example, Diverse Income Trust (DIVI) has an annual redemption facility whereby shareholders can voluntarily tender their shares. Over the past few years this trust has typically traded at…

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