Hi everyone, I am still learning some of the fundamentals in investing. In particular now I am a bit unsure about why an increase in discount rates leads to a drop in NAV for an infrastructure trust (and possibly other trusts too). I read this article:
https://citywire.com/inv...-funds-falling/a2398279
I'm not very familiar with discount rates, but my understanding is it's the opposite of compounded interest rate, e.g., it tells you how much a pot of money should be now so that it reaches X amount in the future. The article says it has two components:
"There are two components to the discount rate. There is the risk-free component (typically government bond yields that provide compensation for waiting – i.e. the time value of money) and there is the risk premium component (the element that reflects the risk of default or delay on the underlying cashflows)."
The following is from the HICL Infrastructure (HICL) annual report 2022: "The discount rate is determined based on the Investment Manager’s knowledge of the market, which includes intelligence gained from bidding and disposal activities, discussions with financial advisers knowledgeable of these markets and publicly available information on relevant transactions."
So then it is an estimation set by the company (probably due to the risk premium component above).
From the table in the citywire article above it results that a larger discount rate leads to a reduction in NAV, suggesting a negative impact on the trust (which would also explain an unprecedented 9% plunge in value today for HICL). Something does not make sense in my mind though, as the way I see it is a higher discount rate would mean its current value would be boosted in the future, so it should have a positive outlook. I would appreciate if someone could clarify this. Thank you!