Almost 90 per cent of investment trusts are on a discount. When will it change?

A significant 88 per cent of all investment trusts are now trading on a discount to their underlying assets, City A.M. can reveal.

The gap between the share price of investment trusts and the price of their underlying assets has got so bad that 30 per cent of all trusts now trade on a discount of over 20 per cent, according to analysis from Dragon Capital.

Around six per cent of investment trusts have a discount of between 15 and 20 per cent; 13 per cent have a discount of between 10 and 15 per cent and 25 per cent have a discount of between five and 10 per cent.

Meanwhile, less than one in 10 (nine per cent) of investment trusts are currently trading at a premium. The last time that discounts were this was wide 16 years ago, at the end of 2008.

Wide discounts have plagued the sector for some time, but when considered, it doesn’t quite make sense. Why would the market price the trust as less than the value of the assets inside it?

“It’s been a challenging couple of years for investment trusts with rising interest rates, misleading cost disclosures and recent market volatility leading to wide discounts,” said Annabel Brodie-Smith, communications director of the Association of Investment Companies.

“The average investment trust discount excluding 3i is currently 14.8 per cent, much wider than at the end of 2021 when the average discount was two per cent.”

So, as the industry has constantly stated over recent months, cost disclosure has been a significant factor in investment trust discounts.

This week, it was revealed that Baroness Sharon Bowles is set to present a private members bill to change investment trust regulations, changing the rule that requires trusts to disclose costs and charges despite being trading on the market.

Trusts are currently treated as investment funds rather than equities in their disclosure, as we would never require a company like Tesco or Shell disclose their costs and charges.

This problem, introduced by European regulation, has been a continual source of frustration for the industry, but it isn’t the only problem.

High interest rates have also hurt trusts, and with the Bank of England beginning to make cuts to the base rate.

“Wide discounts can be a buying opportunity for investors. Our research demonstrated that when discounts were over 10 per cent, the average investment trust returned 89.3 per cent over the next five years,” added Brodie-Smith.

“But when the average discount was less than 5 per cent, the average return was 56.1 per cent over the next five years.”

Brodie-Smith concluded: “It makes sense that buying at a discount gives you better returns because you are buying assets on the cheap, and periods of wider discounts often coincide with lower underlying valuations, giving the potential for a strong market recovery when market conditions improve.”