The perception is that discounts are usually found on trusts where performance has lagged and as investors have sold out the share price drops.
However, there are times when performance can still be strong and yet the investment trust can still be trading at a discount, for example where companies focus on a sector or niche area that is out of favour with markets, or where the performance is not yet priced in.
An example is the property sector, where six of the top-10 investment companies on a discount sit in the AIC Property Direct sectors, including three in Europe and two in Asia Pacific.
The investment trust trading on the highest discount, as of April 28 2014, is the Invista European Real Estate investment company at an 89.4 per cent discount, while the International Oil & Gas Technology trust is on a 82.1 per cent discount, suggesting sectors such as property and commodities are yet to recover investor confidence.
However, Tim Mitchell, head of sales for investment trusts for JP Morgan Asset Management, points out that a general trend in investments trusts at the moment is that discounts are trading at the narrowest level for many years.
As such, of the 243 investment trusts currently on a discount, approximately 127 of them have a discount of less than 10 per cent, and only four companies have a discount of more than 50 per cent.
Mr Mitchell notes the narrowing of discounts in general is partially down to the ownership profile, and a move away from large institutional investors.
He explains: “In the old days something bad would happen in say Russia and you would see large wholesale selling from institutions and then a collapse in price. But you don’t see that rush for the exit now. There is a much more measured approach. Now people are taking a long-term view, so we’re not seeing the selling we would normally associate with geopolitical impact in the market, so discounts have stayed relatively tight.”
That said, with more than 70 per cent of the market trading on a discount, there are some bargains to be had, particularly in the commodities and property sector that are starting to see a resurgence in the open-ended world.
But while the discounts may seem attractive, the underlying assets are the key issue and it is important to understand whether these underlying investments are a long-term home for capital or simply a chance to take advantage of low valuations.
Nyree Stewart is features editor at Investment Adviser
