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View the video online at http://citywire.co.uk/money/video/a862633

A Top Trusts' guide to investment trust discounts

Gavin Lumsden assesses progress in Citywire’s Top Trusts portfolio and explains why he's looking for investment trusts trading on cheap discounts.

A Top Trusts' guide to investment trust discounts

Citywire has given me £10,000 to invest in a portfolio of investment trusts based on the 'Top Trusts' watch-list we've published in our Investment Trust Insider e-zine.

So far I've invested in: Henderson Smaller Companies (HSL ), Jupiter European Opportunities (JEO ), Scottish Mortgage Trust (SMT ), Finsbury Growth & Income (FGT ), Ruffer Investment Company (RICA ), Schroder Asia Pacific (SDP ) and Schroder UK Growth (SDU ).

In this video I give an update on how the portfolio is doing and share my thoughts on investment trust 'discounts', which is when their shares trade below net asset value (NAV).

I explain how one of the best ways to make money on investment trusts is to buy them on cheap discounts and wait for them to rise to a premium, when the shares are above NAV.

Should I look for more opportunities like this?

Can't watch now? Read my script.

Hello, it’s time to look at how Citywire’s Top Trusts portfolio is doing. That’s got me thinking about discounts, which is when investment trusts trade below their net asset value, but more of that later.

It was a tough summer and autumn so I’m pleased my £10,000 investment has recovered from its end of August low, although I’m not back to where I was at the start of that difficult month.

My previous star performer, Henderson Smaller Companies, had an awkward three months, with its net asset value down 4% and the shares nearly 3% lower. But with gains of nearly 16% left, I’m not worrying.

Jupiter European Opportunities, Scottish Mortgage Trust and Finsbury Growth Trust have all held up quite well so I’m pleased with overall progress.

But I’m disappointed shares in the defensive Ruffer Investment Company are down 4% over three months given the net asset value of its portfolio shed 2.7%. I’m 4% up overall.

I’ve lost 6% on Schroder Asia Pacific but that looks worse than it is. Actually the fund has avoided the worst falls in the Far East and the rate of decline has slowed recently.

My big disappointment is Schroder UK Growth where my hoped for recovery hasn’t occurred. The shares are up just 0.9% this year which is less than the 1.6% growth in net asset value manager Philip Matthews has delivered.

The fact its shares have risen less than the value of its investments is because of the discount I mentioned.

Discounts are where a trust’s share is worth less than its net asset value or NAV per share.The opposite to a discount is a premium when the shares are worth more than the NAV per share.

One of the best ways to make money in investment trusts is to buy one on a wide discount and for the discount to narrow or even turn into a premium.

What shareholders get then is a powerful double whammy as the trust’s underlying growth is boosted by the share price catching up with the net asset value.

One way to think about this is to imagine two runners on a track. We’ll call one NAV and the share price SID. SID the share starts a race behind NAV but as the crowd cheers him on he catches up and eventually overtakes NAV.

That’s what happened to Jupiter European Opportunities and many other trusts after the financial crisis.

In March 2009 Jupiter European’s shares stood a massive 23% below NAV.  As investors saw the impressive gains manager Alex Darwall was achieving in the recovery, they snapped up the cheap shares and the discount – or gap – between the share price and the NAV narrowed.

In fact the shares have overtaken the NAV and the trust is now on a 1% premium. As a result the trust’s portfolio has grown by 110% in the past five years, the best in its sector. But the rerated shares have done even better for investors with a total return of 133%.

Unfortunately, Schroder UK Growth started the year on an 8% discount. This narrowed briefly but is back out to 10%. In other words it’s gone backwards!

That’s left me thinking if there are better discount opportunities. More of that next time.

6 comments so far. Why not have your say?

David Andrews

Nov 26, 2015 at 16:27

I've just watched the video. Thinking that it would be more informative. if you used empty yogurt pots and the cardboard tube inside toilet-rolls.

Why the hell don't you print the information as well so it's not necessary to watch these things: I can read much faster than your star can speak ( as well as judge much quicker if it warrants the time )

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MP

Nov 26, 2015 at 16:48

Thanks David. I've avoided watching it.

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Ark Welder

Nov 26, 2015 at 18:55

"Can't watch now? Read my script."

*** Show transcript ***

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Rob Guy

Nov 27, 2015 at 10:12

DA - great comment

Also couldn't be bothered to watch the 'advertorial'

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kenneth douglas

Nov 27, 2015 at 12:55

Never bother, to long drawn out, time wasting.

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David Andrews

Nov 27, 2015 at 14:15

Thanks Ark Welder - it seems I owe Citywire an apology. My quick search for a transcript was apparently too superficial.

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  • Henderson Smaller Companies (Ordinary Share)
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  • Jupiter European Opportunities (Ordinary Share)
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  • Scottish Mortgage (Ordinary Share)
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  • Finsbury Growth & Income (Ordinary Share)
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  • Ruffer Investment Company (Ordinary Share)
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  • Schroder Asia Pacific (Ordinary Share)
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  • Schroder UK Growth (Ordinary Share)
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