This investment trust offers a sneaky way to buy blue chips at a discount.
Many investors' portfolios will contain shares in some of the larger FTSE 100 (UKX) companies, with BP (LSE: BP), GlaxoSmithKline (LSE: GSK) and Royal Dutch Shell (LSE: RDSB) being three of the most common holdings.
An alternative to having to pay a separate dealing commission to buy shares in each company is to indirectly invest in all of them in one go by buying shares in an investment trust that holds all the companies in its portfolio.
In doing so you, should be able to obtain a diversified blue-chip portfolio for a lower price than if you bought each share separately. It's not just the commissions that you save; the vast majority of investment trust shares currently trade at prices well below the net asset value (NAV) of their respective portfolios.
The trust that's at a premium
One investment trust that has a big stake in BP, GlaxoSmithKline and Royal Dutch Shell is the 123 year-old Law Debenture (LSE: LWDB). BP, Glaxo and Shell are three of the trust's four largest shareholdings, forming 7.4% of its portfolio, while the biggest holding is engineering company Senior (LSE SNR), which represents 3.4%.
Law Debenture's current share price is 405p, having risen by 21% in 2012, and they are trading at a premium of 14% to the trust's latest NAV of 354p. You may be wondering why they trade at a premium when other trusts with similar portfolios trade at a discount but I can assure you that there is a very good reason for this discrepancy.
A nice little earner on top
Law Debenture differs from other investment trusts because it owns a fiduciary-services business. In 2011, earnings per share (EPS) from this business were 7.25p though the EPS for the most recent half-year, published two weeks ago, fell by 3% to 3.45p. These profits provide much of the income that underpins Law Debenture's 3.3% yield, yet there is nothing whatsoever in the published NAV to allow for it.
So if we value the fiduciary-services business using a fairly conservative P/E ratio of 10, we end up with 72.5p per share (10 x 7.25p). Adding this figure to Law Debenture's quoted 354p per share NAV increases gives 426p, which now puts the shares on a 'discount' of 5.2%. While that's not a big discount, some investors may value the global custody business using a much higher P/E, so their 'discount' will be higher.
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> Tony owns shares in GlaxoSmithKline and Law Debenture.
