Buying investment trusts when they trade on a discount to net asset value and selling when that gap has narrowed has been a popular investment strategy for many people. Unfortunately, the rebound in the stock market since the Covid-inspired crash in early 2020 has rendered that strategy much harder to execute.

Numerous investment trust sectors have seen their discounts almost disappear. For example, the UK All Companies sector now trades on a 1.7% discount to net asset value versus a 7.3% average discount for the past 12 months, says Winterflood.

Renewed interest in UK stocks has seen JPMorgan Mid-Cap (JMF) go from a 12-month average discount of 9.6% to now trade at a mere 1.7% discount.

The commodities sector trades on a 3.3% discount versus a 12-month average of 11.8%; and Japanese trusts trade on a 1% discount compared to a 12-month average of 4.5%.

Interestingly, a few technology-focused investment trusts have gone the other way, such as Polar Capital Technology (PCT) which is trading on a 7.6% discount versus a 12-month average discount of 4.4%. Scottish Mortgage (SMT) is trading on a 2.9% discount compared with an average discount of 0.7% over the past 12 months. That could be explained by tech stocks losing favour with investors this year.

Some investment trusts deploy a discount control mechanism, buying back shares when they trade below NAV or issuing new shares when existing ones trade at a premium. Others leave it to the mercy of the markets, with large discounts often seen with private equity and small cap trusts due to concerns about liquidity – namely the ability to sell assets quickly if required. Some trusts trade at a premium if demand for the investment focus is high, such as in the infrastructure space.

Investors can use z-scores to see how far an investment trust premium or discount is above or below its 12-month average. A z-score of -2 or below is significantly below its one-year average and could be considered cheap. A z-score of +2 or more could be considered expensive. 

Just remember that investment trusts trade on a stock market and prices can move up and down each day, so discounts/premiums and z-scores can change quickly. It is also worth considering that picking a trust based on a good track record and manager expertise could ultimately provide greater rewards than trying to make a quick buck by trading any trust simply in hope of the NAV discount narrowing.

Disclaimer: The author owns shares in Smithson (referenced in table).

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