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What is a discount on an investment trust?

What does it mean when an investment trust is trading on a discount to net asset value? And how does it impact returns?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • How is the value of an investment trust calculated?
  • What does it mean when an investment trust is trading on a discount or premium?
  • How does a trust’s discount level impact investment returns?

Read transcript

Emma: Hello, I'm Emma Wall and here with me today to talk about what a discount on an investment trust is, is Rachel Beagles Chair of the AIC. Hi Rachel.

Rachel: Hi Emma.

Emma: So we should start really with some of the acronyms, before we go into what is a discount. Let's start with NAV, what does NAV mean when applied on an investment trust?

Rachel: So the NAV, or the net asset value, is the value of all the assets in the portfolio less the value of anything that the company owes, like debt, divided in total by the number of shares in issue. So essentially, it's the intrinsic value of what you're buying, when you're buying a share in an investment trust.

Emma: And that could be the company's buildings, or network or products - the 'things' that the company really owns.

Rachel: That's right. An investment trust can invest in a wide range or spread of assets, from traditional equities to debt, to contracts on music royalties to property, to infrastructure. A huge variety of assets, so it would be the total value of all those assets less the liabilities that the company owes, divided by the number of shares.

Emma: So why is it then that an investment company doesn't always reflect that NAV in it's share price?

Rachel: So the premium or discount that the share price will trade at, with respect to the NAV, reflects the sentiment in the shares and the supply and demand patterns for those shares. So, a company that would have an NAV of £1 could trade, for example, at a share price of £1.10 and that would be a 10% premium to NAV and that would typically be because there was demand for those company shares and so shareholders were willing to pay a premium for those net asset values in anticipation that that NAV would grow perhaps more than the market expected in time. Similiarly, a company that is trading at £0.90 against a NAV of £1 would be trading at a discount because shareholders might be taking a slightly more conservative view or it might be an asset class where shareholders are pulling capital out, and so the shares might move to a discount to reflect that.

Emma: Say I’m about to buy shares in an investment company, how might a discount or a premium influence my decision making?

Rachel: I think the first thing to do is to make sure you understand why the shares are trading at a premium or discount and take a view as to whether or not you think that's going to change over time. So, you could, without the NAV increasing or decreasing, you could make money by buying shares at a discount and that discount becoming less of a discount or indeed becoming a premium, or you could make money by buying shares at a premium, if you think that premium was going to get bigger. I think the important thing is that investors do their research and understand why the sentiment in the shares has made the rating as it is, and are able to take a view going forward as to whether those conditions are likely to change.

Emma: And understanding that the share price is not just a reflection of the underlying assets, it's a combination of the NAV and that discount or premium?

Rachel: Yes, that's right. And the AIC website has got loads of information on all of this and will give you the discount or premium that the shares are trading at and give you a sense as to where that's been historically.

Emma: Rachel, thank you very much.

Rachel: Thank you.


This video is not personal advice or a recommendation to invest. If you're unsure about the suitability of an investment please seek advice. All investments can fall as well as rise in value, so you could get back less than you invest.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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