Does the level of discount seen in the investment trust market point to potential for better returns in the coming years? ... it does in the view of the Association of Investment Companies (AIC) industry body, which posted some in-house research.
Against a backdrop of 'double-digit discounts' since May 2022, the AIC had worked backwards to calculate and analyse the market as far back as 1972.
The dataset cited in the AIC note starts on 29 December 1972 and shows spells when trusts traded at double-digit discounts, and it highlights that discounts stayed in double digits for 16 years and 6 months from December 1972 to June 1989. A second period ran for 3 years and 7 months between June 1997 and January 2001, before the current stretch began in May 2022 until December (and to date).
The widest average discount in the series was 41% in October 1976. The narrowest was 2% in December 1993.
Research director Nick Britton said: “In the 1970s and 1980s, investment trusts generally traded at double-digit discounts.”
He said a 1999 law change that allowed buybacks has helped some trusts manage discounts, while ETFs have influenced what investors view as acceptable.
Britton also said “record levels of share buybacks and corporate activity” have been seen in recent years.
"Increasing competition from other fund structures, such as ETFs, has changed investors’ expectations about what level of discount is acceptable," Britton added.
“Investment trust boards are not complacent about discounts. We’ve seen record levels of share buybacks and corporate activity over the past few years. Investors should bear in mind that historically, investing during periods of double-digit discounts has tended to lead to better returns over the following five years.”