Net Asset Values of Investment Trusts ? What are they? Can one ignore them?

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17th Nov '21 by njoydev12

4 comments 386 reads

Hello. I have a daft question about Net Asset Values.

What exactly are they? Yes, we know that they can be trading as at a discount or a premium - but what is the reasoning that goes with those investment trusts trading at a discount are more attractive than those trading at a premium? Also, if one should ignore NAVs - what would be the advantage of disadvantage of this? I have always ignored it, mainly because I don't understand it - and then recently I discovered some well- respected sources also don't take it into account. So, how handicapped are we for ignoring it?

Any pointers will be gratefully received.

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Njoydev12

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4 comments

gus 1065

17th Nov '21

Hi njoydev12.

Only daft question is one that doesn’t get asked.

In relation to an investment trust it is the aggregate value of its assets less any debt/leverage that that the IT has taken on to fund the purchase of such assets. This is often then divided by the number of shares outstanding to give a NAV per share which can be compared to the underlying share price in the market. If NAV per share is bigger than the price of the share then the IT is said to be trading at a discount, i.e. if you buy one share you are getting more than the value of the share in assets.

Since many ITs hold liquid traded shares, the NAV is reasonably transparent and can be calculated in real time (and at least once a day at market close prices). It gets a bit harder if holdings are unlisted or alternative asset classes such as property or where the market in the shares is very thin and any material sale by the IT could have an adverse impact on the price. There are various reasons why ITs trade above or below NAV; premia can be attributed to a good manager and/or a view that unlisted assets are worth more than when they were last valued. Discounts may occur for the reverse thinking and also to reflect the ongoing costs of running the IT and possible cost/impracticality of trying to liquidate the IT to extract value.

Personally I do look at NAV when considering whether and when to buy an IT and don’t typically buy when they are trading at a premium unless there is an overriding reason to do so. For example, with the recent Oxford Nanopore Technologies (LON:ONT) IPO I bought shares in Schroder Uk Public Private Trust (LON:SUPP) as a means of getting exposure to an asset that I thought would rise post IPO that wasn’t readily available to the PI. (Although this particular ITs shares were and still are at a discount to NAV).

Hope that helps.

Gus.

ken mitchell

17th Nov '21

njoydev12

Here’s a beginners way to explain NAV to (over!) simplify Gus65’s excellent explanations.

Suppose your own investment portfolio is currently worth £20k. That is it’s NAV.

If you offer to sell your portfolio to me AT NAV level, I’ll have to pay you £20k.

If you offer to sell it to me at a 10% premium to NAV I’ll have to pay you £22k for a portfolio worth £20k.

If you offer to sell it to me at a 10% discount to NAV I’ll have to pay only £18k.

So It’s crucial to consider whether our potential Investment Trust buys are at a premium or discount.

I search out and invest in quality Investment Trusts at big discounts to NAV.

E.g Canadian General CGI currently at over 30% discount and the 3 Vietnam Invretment Trusts, all top performers, but because Vietnam is off the radar for many investors all 3 (VEIL, VOF and VNH) are at big discounts to NAV.

This site is a must use for Investment Trusts. This one includes CGI.

https://www.theaic.co.uk/aic/f...

JohnEustace

21st Nov '21

One other thought. Many investment trusts have policies that allow them to buy back or issue new shares in order to manage their discount / premium levels.

In the case of CGI (I hold) they are heavily family owned and don't appear to do buy backs. So while it is attractive to buy at a discount, particularly when the top holdings are all decent listed companies, you have to ask what will trigger a revaluation and how long you are prepared to wait. I decided the CGI discount was so large that I would wait and trust in market forces to do something.

ken mitchell

21st Nov '21

It’s true that for reasons I’ve forgotten CGI can’t or don’t buyback their shares to try to reduce the huge discount to NAV. But what matters more imo is how the Trust has performed, and that has been excellent.

Also, though not wanting to get in to yet another debate about the merits or otherwise of Investment Trusts buying back their shares in attempt to reduce the discount, there is evidence this isn’t that effective. The discount sometimes narrows temporarily while they are buying back only to widen again when they stop.

Here’s an example that proves nothing but at least brings in to question whether buying back to reduce the discount works.

AEWU is my best performing Investment Trust REIT, up 70% since purchase and doubled if including dividends. When I bought the discount was an exceptionally wide 40%. That has now narrowed to no discount at all, without recourse to buybacks.

Another REIT I also hold, SREI, has been buying back heavily but the discount has stayed stubbornly wide and the share price gain since I bought and pre the buybacks is much smaller.

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Net Asset Values of Investment Trusts ? What are they? Can one ignore them?

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Njoydev12

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