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Investment trusts 101 - understanding performance over time

How can investors measure a company's performance against the wider sector?

Investment trusts 101 - understanding performance over time

To understand whether a fund manager is doing a good job, there are several technical tools that investors (and trust boards) swear by.

First, investors can look at the trust’s performance compared to the wider sector: the relative return.

While the absolute return simply indicates whether a company has provided returns over a certain period, the relative return observes it in relation to a benchmark, typically an index of like funds

Asset managers who measure their performance in terms of an absolute return tend to have a short-term outlook, while managers focusing on relative returns usually rely on long-lasting market trends, according to analysts.

Trusts don’t all pay the same level of dividends and when comparing two companies’ performance, it’s important to include them, otherwise a trust distributing more capital will seem to generate lower returns than others.

NAV performance

Another helpful benchmark for investors is the net asset value (NAV) total return performance, which shows how the NAV (underlying assets) per share has performed over a period of time, taking into account both capital returns and dividends paid to shareholders.

Share price performance

Ultimately, however, investment companies are judged by their share price performance and whether they are trading at a premium or a discount to NAV.

The average industry discount has narrowed considerably in the past ten years: from 11% between 2000 and 2010 to 1.9% at the end of January. 

According to the AIC, that narrowing reflects investment trusts focusing on income-generating assets.

However, the coronavirus crisis has shaken market confidence.

At the end of January, 29% of investment companies were trading at premiums, falling to only 18% at the end of February and 13% on 26 March.

“During the past few weeks, discounts have occasionally been at levels seen in the global financial crisis, but they have also been extremely volatile, as has the wider market,” Nick Britton, head of intermediary communications at the AIC, told Proactive.

“Investors should take the long view and remember that discounts offer opportunities as well as risks.”

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