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Keith Cobby
Posted: 29 January 2025 16:43:53(UTC)
#24

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Investing is an art rather than a science, if there was a correlation between discounts and performance it would be obvious to everyone. Buying trusts on discounts and waiting for them to close has never been proven to be any better than any other arbitrary method. If it was, AVI trust would be at the top of its sector rather than mid table. Generally, discounts are a function of performance and there are plenty of trusts on large discounts for good reason and without a hope of closing them, although I suppose you could hold indefinitely in the hope of performance improving. Sometimes discounts offer opportunity, but it's not a secret sauce.
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guantou on 29/01/2025(UTC), Raj K on 29/01/2025(UTC), Jesse M on 29/01/2025(UTC), North Star on 29/01/2025(UTC), Ramondo on 30/01/2025(UTC), Dexi on 30/01/2025(UTC)
Tom 123
Posted: 29 January 2025 17:01:37(UTC)
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Keith Cobby;332570 wrote:
Investing is an art rather than a science, if there was a correlation between discounts and performance it would be obvious to everyone. Buying trusts on discounts and waiting for them to close has never been proven to be any better than any other arbitrary method. If it was, AVI trust would be at the top of its sector rather than mid table. Generally, discounts are a function of performance and there are plenty of trusts on large discounts for good reason and without a hope of closing them, although I suppose you could hold indefinitely in the hope of performance improving. Sometimes discounts offer opportunity, but it's not a secret sauce.


Most IT sectors come in and out of fashion as investors chase the in thing or dump what's out of fashion.

I think buying an out of flavour IT and waiting until that sector becomes fashionable again can provide an added boost.

Also buying at large discounts gives something of a margin of safety, in the sense that you are not paying for froth of the general market exuberance.

Having said this, I tend only to consider large, well capitalised ITs these days. Some small ITs are obviously at large discounts for a reason.

If you have a long enough horizon then buying at discount and selling at large premiums is a system of producing decent risk adjusted return without getting sucked in at the wrong time.
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Big boy on 29/01/2025(UTC), Dexi on 30/01/2025(UTC)
Shetland
Posted: 29 January 2025 17:04:55(UTC)
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Joined: 13/03/2015(UTC)
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Look at Marlborough Global Small Cap. Up 25% in the last year
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MarkSp
Posted: 29 January 2025 17:05:05(UTC)
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Keith Cobby;332569 wrote:
Piece by Jonathan Guthrie in the FT "Do investment trust discounts even matter?"


What matters is the move in the discount = buy a great portfolio on a 10% discount and the discount stays at 10% who cares?

Buy a great portfolio at +20% and it goes to a 20% discount, you still have a great portfolio and a thumping capital loss
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Big boy on 29/01/2025(UTC), Sheerman on 29/01/2025(UTC), North Star on 30/01/2025(UTC)
Big boy
Posted: 29 January 2025 19:16:00(UTC)
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MarkSp;332573 wrote:
Keith Cobby;332569 wrote:
Piece by Jonathan Guthrie in the FT "Do investment trust discounts even matter?"


What matters is the move in the discount = buy a great portfolio on a 10% discount and the discount stays at 10% who cares?

Buy a great portfolio at +20% and it goes to a 20% discount, you still have a great portfolio and a thumping capital loss


Clearly you don’t understand how markets work.

Using ITs with say 99% in quoted and bought on 25% discounts and then sold on 15% discounts will mathematically add value.

When sectors/areas are out favour SPs weaken/oversold and ITs in same sectors/areas are oversold on discount of 25%.

As net sellers finish and net buyers return we clearly add value via a double whammy.

Clearly the FMs of AVI etc. tend to use intellect and lack the in depth skills and knowledge.

Also I suspect they are constrained by running too much money. It’s very important to work very closely with MMs in order to add value and clearly they don’t have the ability to massage performance.
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Johan De Silva on 29/01/2025(UTC)
RT7
Posted: 29 January 2025 19:43:56(UTC)
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Joined: 18/12/2023(UTC)
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More shite from BB, thanked by Joanne de sliva ...
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ben ski
Posted: 29 January 2025 19:48:42(UTC)
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MarkSp;332573 wrote:
What matters is the move in the discount = buy a great portfolio on a 10% discount and the discount stays at 10% who cares?


It depends how the IT returns value.

So these infrastructure ITs, the forecast returns have become quite high, even assuming discounts don't change, because value's being returned via dividends. So you're buying the shares at market price, but getting the cashflows at NAV.
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ben ski
Posted: 29 January 2025 20:00:08(UTC)
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Keith Cobby;332570 wrote:
Investing is an art rather than a science, if there was a correlation between discounts and performance it would be obvious to everyone. Buying trusts on discounts and waiting for them to close has never been proven to be any better than any other arbitrary method. If it was, AVI trust would be at the top of its sector rather than mid table. Generally, discounts are a function of performance and there are plenty of trusts on large discounts for good reason and without a hope of closing them, although I suppose you could hold indefinitely in the hope of performance improving. Sometimes discounts offer opportunity, but it's not a secret sauce.


As BB says, it's a certainty – if you buy below the market price, and sell above it (or less below it), you'll generate an excess return vs the market. The only thing you have to cover is fees – but the fact IT discounts fluctuate so widely means they're not just pricing in fees.

The problem with AVI and Unicorn Mastertrust is that IT discounts can be across the sector. So if most their portfolio goes down, they haven't got dry powder to buy. It's also hard to benchmark. And you see from this chart, you're typically waiting about 10 years for prices to mean revert – while most retail investors only look at 5 year charts.

investment trust discounts
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Tom 123 on 29/01/2025(UTC), Big boy on 29/01/2025(UTC)
Big boy
Posted: 29 January 2025 20:14:31(UTC)
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ben ski;332587 wrote:
Keith Cobby;332570 wrote:
Investing is an art rather than a science, if there was a correlation between discounts and performance it would be obvious to everyone. Buying trusts on discounts and waiting for them to close has never been proven to be any better than any other arbitrary method. If it was, AVI trust would be at the top of its sector rather than mid table. Generally, discounts are a function of performance and there are plenty of trusts on large discounts for good reason and without a hope of closing them, although I suppose you could hold indefinitely in the hope of performance improving. Sometimes discounts offer opportunity, but it's not a secret sauce.


As BB says, it's a certainty – if you buy below the market price, and sell above it (or less below it), you'll generate an excess return vs the market. The only thing you have to cover is fees – but the fact IT discounts fluctuate so widely means they're not just pricing in fees.

The problem with AVI and Unicorn Mastertrust is that IT discounts can be across the sector. So if most their portfolio goes down, they haven't got dry powder to buy. It's also hard to benchmark. And you see from this chart, you're typically waiting about 10 years for prices to mean revert – while most retail investors only look at 5 year charts.

investment trust discounts



Great to see MEPIT and KEPIT which I think were a great success and issued by Warburg. As usual launched near highs and went to discounts soon after launch.
Buying UK Smaller on 25% discounts only took 6 months before major correction due to Tech dot boom. FE on 25% discounts due to financial crisis corrected much the same as underlying stocks recovered and discounts narrowed to selling level of 15%.

In many cases large discounts happened as sectors/areas were oversold as SPs moved lower. Sometimes large discounts indicated the underlying stocks were undervalued.

I never worried about fees but as net sellers of stock it was possible to buy below the bid price and once stock was removed from market the MMs tend to put the price up. This benefit far outweighed any fees etc.
Thank you for an interesting graph.

Added . Having been on the floor of The Stock Exchange I gained a head start on others.
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ben ski on 29/01/2025(UTC)
ben ski
Posted: 29 January 2025 20:32:25(UTC)
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Joined: 15/01/2016(UTC)
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And of course, the other side of the discount trading argument is that, very recently, you could buy a lot of very overpriced ITs – like LTI.

It was only a few years ago I realised Renewables ITs were offering far better value than bonds (at 0-1%). And it made no sense how cheap they were. So I was in things like Foresight Solar, UKW, TRIG, etc.

Then they went to 15-30% premiums. I wondered if the market knew these were perishable assets – and not just bond replacements. So I sold out within a year or two. And that showed how easy it would be to lose money, buying expensive. A lot of these trusts had big uplifts to NAV, since I sold (I guess later 2020), due to black swan events and energy prices. Yet wouldn't have done very well, having bought on a premium ... I wonder if 3I's going to be another case of that – even though it's a great trust. There is an appropriate price for most things.
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2 users thanked ben ski for this post.
Big boy on 29/01/2025(UTC), dlp6666 on 30/01/2025(UTC)
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