The AIC issued a press release today saying the average investment company discount was now 3.4% – a record low since the figures were first recorded in 1970. The AIC (Association of Investment Companies) represents investment companies such as investment trusts so you can see why they would want to fanfare this figure. Investors in such trusts generally welcome a narrowing of discounts (net asset value versus share price) although it no longer means they can buy the underlying assets on the cheap.
What is the hidden message to take from this announcement? Namely that the typical investors in investment trusts (who are often private individuals, directly or indirectly) are either coming to recognise the value of these companies or are simply becoming more optimistic about stock market investment. When stock market trends look positive, the discounts tend to narrow, as they last did in 2006. But the impact of RDR (Retail Distribution Review) might have made many more people look at traditional investment trusts rather than other collective funds such as unit trusts and OEICs.
Another positive factor might have been the wider publicity that investment trusts often have better performance combined with lower fund management fees. This was again highlighted in an article by John Authers (“Smart Money”) in the Financial Times on the same day. He reported that over the last year the AIC All Companies sector has averaged a gain of 31.5% in terms of share price which is only slight more than the move in net asset values. Meanwhile equivalent open-ended funds only gained 26.15% according to Lipper. Meanwhile the FTSE AllShare was only up 19.2%.
Over the longer term, investment trusts have demonstrated clear superiority while open ended funds lagged the AllShare index.
Mr Authers asks “how did investment trusts do it”? His answers were by avoiding the mega-cap mining and oil companies of late. Plus investment companies have few restrictions on what they can invest in and can also use leverage, which is a big advantage in a rising market. Finally he suggests that the narrowing of discounts should temper enthusiasm for these companies.
Wise words perhaps but band-wagons tend to roll longer than you expect.