Investment trusts, like shares, trade on a stock exchange. So, unlike open-ended funds, the share price of an investment trust can differ from the value of the underlying assets, or net asset value (NAV).
When the price of an investment trust is below the NAV, it is said to be trading at a ‘discount’. And it is at a ‘premium’ when the price is higher than the NAV.
This article isn’t personal advice. All investments and any income from them can rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. If you’re not sure an investment is right for you, ask for financial advice.
Why do trusts trade at a discount or premium?
The price of an investment trust is determined by supply and demand. If demand is higher and more investors are willing to buy, then prices will typically rise. The opposite is true when demand is weak as investors looking to sell their shares may have to accept a lower price to find a buyer.
Different factors can affect the demand for a trust.
It might be about its performance, or perhaps its investment style or the sector it focuses on. Either way, if investor confidence is lower, demand could fall, leading to a lower share price and wider discount. The reverse of this could lead to a premium.
What can trusts do to manage their discount?
If a trust’s discount gets too wide, there are tools available to narrow the discount closer to the NAV. These are handled by the board rather than by the trust’s manager.
The board may buy back shares, which increases the level of demand in the market. In theory, this increases the share price and closes the discount. That said, too frequent share buybacks can actually reduce the amount of capital available for the managers to invest.
Some investment trusts have formal policies when it comes to managing a discount or premium.
If the discount hits a certain level, like 10%, then the board will begin buying back shares until the discount returns to a stated threshold. Without a formal mechanism in place, the board may have to seek shareholder approval to buy back shares.
When a trust is trading at a premium, the board may decide to issue shares. This increases supply in the market and aims to bring the trust’s share price back towards its NAV.
Should I buy a trust that is trading at a discount?
That depends.
If you believe that the discount will close, or potentially even move to a premium, then you could pick up a bargain because a narrowing discount can boost returns generated by the underlying assets. Of course, there are no guarantees that this will happen and there’s also the possibility that the discount could widen.
Here are three investment trusts, currently trading at a discount, with long-term potential.
Investing in these trusts isn’t right for everyone. Investors should invest only if the trust’s objectives are aligned with their own and there’s a specific need for the type of investment being made.
You should understand the specific risks of a trust before investing and make sure that any new investment forms part of a diversified portfolio. All three of these investment trusts use gearing (borrowing to invest), which magnifies both gains and losses and, therefore, increases risk.
Edinburgh Investment Trust
Edinburgh Investment Trust invests in UK companies and aims to grow its dividend faster than the rate of UK inflation. Although the trust invests mainly in larger well-established companies, it can invest in higher-risk smaller companies.
Imran Sattar has managed the trust since February 2024, although his fund management career dates back to 2003. He looks for quality companies with resilient business models and strong management teams. His focus is on identifying growing businesses with well-established economic moats.
The trust invests in a relatively small number of companies, meaning that each one could have a greater impact on performance and can increase risk.
At the time of writing, the trust trades at a discount of 7.64%.
Baillie Gifford Japan Trust
Baillie Gifford Japan Trust invests in companies based in Japan. It invests in companies of all sizes, including higher-risk small and medium-sized businesses.
The trust is managed in line with Baillie Gifford's growth-focused investment philosophy, with a focus on companies with high or sustainable growth potential. These companies are divided into four buckets, each with its own unique driver of growth.
Matthew Brett is the trust’s lead manager. He has more than 20 years’ experience in the investment industry, all of which have been spent at Baillie Gifford. Brett joined Baillie Gifford’s Japan team in 2003 and became lead manager of the Japan Trust in 2018.
At the time of writing, the trust trades at a discount of 8.07%.
Polar Capital Technology Trust
Polar Capital Technology Trust aims to grow by investing in companies exposed to some of the world’s key technological innovations. The trust focuses on companies with proven technologies where adoption could dramatically increase.
Ben Rogoff has managed the trust since 2006. He has more than 30 years’ experience of investing in technology companies. He’s supported by deputy manager Alastair Unwin as part of the wider 12-person technology team at Polar Capital.
The trust may invest in smaller companies as well as those in emerging markets, both of which are higher risk. A trust focused on a single sector should form only a small part of a well-diversified investment portfolio.
At the time of writing, the trust trades at a discount of 7.34%.
Annual percentage growth
July 2021 to July 2022 | July 2022 to July 2023 | July 2023 to July 2024 | July 2024 to July 2025 | July 2025 to July 2026 | |
|---|---|---|---|---|---|
Edinburgh Investment Trust | 7.31% | 10.33% | 23.82% | 6.75% | 9.36% |
AIC Investment Trust – UK Equity Income | -6.11% | 4.50% | 13.75% | 11.36% | 19.24% |
Baillie Gifford Japan Trust | -22.85% | 3.22% | -2.37% | 12.02% | 25.41% |
AIC Investment Trust - Japan | -13.66% | 10.43% | 11.81% | 10.31% | 32.70% |
Polar Capital Technology Trust | -12.08% | 8.18% | 33.26% | 30.31% | 55.85% |
AIC Investment Trust – Technology & Technology Innovation | N/A | 0.96% | 13.83% | 10.59% | 0.01% |