Discounts to the value of assets held, and more rarely premiums, are par for the course when it comes to investment trusts. These are best understood as the gap between the share price and the net asset value (NAV). For example, a trust with 100p of assets per share and a 95p share price trades at a 5% discount to NAV. Discounts can give savvy investors the chance to buy assets for less than they are worth, at least in theory, but in practice it is important to do some digging and understand why a discount exists.
Most trusts trade at a discount most of the time, which should pique the interest of bargain-hunters since discounts can be a ‘buy’ signal. However, buying at a discount isn’t automatically a good thing, because the price of investment trust shares depends on a raft of factors ranging from market sentiment towards the strategy, to the manager’s track record, so there may be a good reason that explains a persistent discount to NAV.
In recent years, a number of headwinds have pushed average investment trust discounts to record levels, creating opportunities for investors. 2022’s sharp rise in interest rates drove investors away from high-yielding trusts in favour of more traditional sources of income and many renewable energy infrastructure trusts, for example, swung from large premiums to cavernous discounts.
At the time of writing, the Association of Investment Companies’ (AIC) website shows the average discount of all trusts save for private equity outlier 3i (III) is 14.5%. By historical standards that is very wide, and yet some trusts trade at discounts of 50% or more.
James Carthew, head of investment companies at QuotedData, observes that at the end of April 2025, just 20 of the 284 investment companies his firm follows were trading at a premium to NAV, while the median discount was 12%.
Understanding the mechanics
If you buy at a discount and the share price rises more than the NAV, narrowing the discount, you’ll get a better return than the NAV. If the discount widens, for example by the NAV rising faster than the share price, you won’t get as big a return as the NAV but you won’t necessarily make a loss. If the discount widens because the share price and the NAV are both falling, but the share price is falling faster, you will lose more than the fall in the NAV.
Say you invest in a trust where the investments it holds rise in value by 10%, which is called the NAV return. You invest on a 10% discount, and sell it when the discount has narrowed to 5%. The effect of this can be seen in the table provided. You invested at a share price of 90p, but sold at 104.5p, and the narrowing of the discount has transformed a 10% NAV return into a 16.1% share price return. Of course, this can work the other way round should the discount widen.
WHAT IS THE DISCOUNT TELLING YOU?
The level of discount at which you buy can affect the return you get as a shareholder; how much discounts matter really depends on your time horizon; short-term traders may invest at deep discounts in the hope they narrow quickly, whereas long-term investors tend to be less fixated on the gap between share price and NAV.
Discounts are usually down to a mixture of factors and there may be no simple fix or catalyst to bring the discount in. Subdued demand for a trust’s shares could be attributable to poor performance or an investment style which is firmly out of favour. Trusts with a low profile can also trade at sizeable discounts, as those managed by boutique fund management firms can fly under the radar of many investors.
Another factor is changes in supply of a trust’s shares, which can happen through share buybacks or issuing new shares. Buybacks reduce supply, which can reduce a discount or stop it widening further. Issuance has the opposite effect and is normally done when trusts trade at a premium, stopping that premium getting too wide and putting off new investors. Boards use buybacks and issuance to reduce the volatility of discounts.
Nick Britton, research director at the AIC, tells Shares: ‘Discounts have been described as a kind of opinion poll on an investment trust – an index of its popularity or otherwise. However, there is a bit more to it than that.’
He points out discounts can also be moved by changes in a trust’s shareholder base. ‘Say there’s an institutional investor who holds a big stake in a trust, and wants to sell it over time. Unless others are equally keen to buy, heavy selling by the institution can keep the trust’s discount wide until it has offloaded its whole stake. Recently, we have also seen the opposite happen – activist investors gradually building up large stakes in trusts in order to acquire voting rights, in the process helping to narrow their discounts.’
Also lending his view is Alan Ray, investment trust research analyst at Kepler Partners. ‘Market sentiment, positive or negative, is the simplest explanation for a discount, and investors can take a view whether they believe that sentiment is too pessimistic, or optimistic,’ says the Kepler number-cruncher. ‘Investment trusts can often be “oversold” because they may have a limited range of investors willing to buy when everyone else is selling. So negative markets can result in an even more pessimistic discount.’
In other instances, there could be a technical reason for the discount, such as the ongoing cost disclosures issue which provides investors with a misleading impression on charges and led to large wealth managers selling investment trusts.
‘One of the reasons activists like Saba have been able to capitalise on discounts is they are able to buy large amounts of shares in conventional investment trusts when few others are willing or able to do so,’ says Ray.
Of course, a discount may be an indication that something is wrong. ‘This is where doing some homework can pay off,’ adds Ray. ‘Reading annual reports and looking into things such as gearing, dividend cover, the valuations of the assets, especially if they are unlisted assets. And it might simply be that on further reading, one doesn’t really understand the investment. That’s a very good reason not to invest in something. The biggest discount may not be the biggest opportunity.’
Trusts investing in unlisted assets often trade at discounts to reflect the greater uncertainty involved in valuing these assets, and the fact they are less liquid or, in other words, more difficult for managers to sell should they want to.
The AIC’s Britton says an upcoming continuation vote often has the effect of narrowing a discount. ‘Investors assume if the discount is too wide then shareholders will opt to wind up the trust and get their money out close to NAV. That creates demand as investors look to take advantage of the short-term opportunity, which then closes the discount. You get a similar effect if investors believe an activist shareholder will put pressure on a trust’s board to wind it up, or return capital to investors through a tender offer.’
Popular trusts whose discounts have come in this year include Murray International (MYI), whose strategy of avoiding highly-rated growth stocks has paid off year-to-date and helped to narrow the discount from 9% at the start of the year to 4.6%. The popular Fidelity Special Values (FSV) has enjoyed a strong re-rating from the tariff-tantrum lows reached in April, bringing its discount in from 8% at the start of the year to 4.2%. Elsewhere, a more recent rally at Octopus Renewables Infrastructure (ORIT), which has tended to trade at a slightly wider discount to its rivals, possibly due to a shorter track record and previously high level of commitments, has brought its discount in to 28.1%, slightly narrower than the renewables peer group average.
The MIGO view
Charlotte Cuthbertson, co-manager of specialist closed-end fund investor MIGO Opportunities Trust (MIGO), tells Shares: ‘Not all discounts represent an opportunity, and therefore our key focus is to find the discounted investment trusts where we can identify a concrete catalyst which will allow the discount to narrow. That catalyst can be organic; for example, last year The Schiehallion Fund (MNTN) saw its discount narrow as sentiment towards growth strategies improved, and investors gained greater confidence in Baillie Gifford’s valuation process for private companies.’
However, more often the catalyst must be created, argues Cuthbertson. ‘Professional investors can play an active role in unlocking value, such as engaging with boards to initiate discount-reducing measures like tender offers, portfolio sales, or wind-downs. In today’s market, activist pressure has become a key driver of returns and has the potential to be very profitable for catalyst-driven investors like MIGO.’
DO YOUR RESEARCH
The first port of call for discount analysis is the AIC website. By clicking on a sector, take Global, for example, you can see whether the discount on the trust you are researching is wide or narrow versus its peers. To view a particular trust’s discount history, click on the company page – global growth fund Scottish Mortgage (SMT) is a good example - then click the ‘performance’ tab at the top left of the page and scroll down to the interactive graph, which you can customise to show the discount history over various time periods.
BARGAINS GALORE OR CAVEAT EMPTOR?
QuotedData’s Carthew says trusts with liquid portfolios can be more aggressive about controlling their discounts and cites Bellevue Healthcare (BBH) as a recent example of a trust which has adopted an aggressive discount control mechanism. European Opportunities (EOT) is going down a different route,’ says Carthew, ‘implementing another 25% tender offer, but this has helped bring its discount down recently.’
Carthew says there is no right discount number for illiquid assets, but 20–25% ‘looks a bit high and it is worth remembering often these portfolios can be realised at asset value or higher, if you are prepared to be patient.’ Great recent examples of this have been the bids for Harmony Energy Income (HEIT), which ended being struck at asset value, and BBGI Global Infrastructure (BBGI), one of the most reliable infrastructure trusts, which is being taken private at a small premium.
The QuotedData analyst sees some bargains on offer, but warns some of these are riskier than others. HydrogenOne’s (HGEN) 75% discount seems ‘excessive, but it is investing in businesses that are still at an early stage’, says Carthew. Another exceptionally cheap Renewable Energy Infrastructure sector constituent is SDCL Energy Efficiency Income (SEIT), whose 51% discount likely reflects its US exposure and the antipathy of the Trump regime to the sector. Yet Carthew reckons the misery is ‘probably overdone. The company is exploring ways of narrowing the discount and it seems inevitable more of these trusts will disappear. Bids like the one for Harmony Energy Income are rare and harder to achieve for trusts with diversified portfolios such as SDCL’s, but more trusts may join the ranks of those selling off their portfolios to fund returns of capital to investors.’
DISCLAIMER: James Crux has a personal investment in Fidelity Special Values.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
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