Investment trusts publish regular updates on the values of their assets. That comes in the form of a net asset value per share (NAV) figure, which states the underlying value of one share’s worth of assets. And that’s a great help in understanding the value of our investments.
In reality, the shares actually tend to be priced typically at a modest discount to NAV. There’s no conclusive agreement why that is, but a lot of factors undoubtedly contribute to it.
Premium
Occasionally, an investment trust’s shares will sell at a higher price than NAV, at a premium. It often happens when a trust is newly launched amid early optimism, but there’s rarely a big premium.
But take a look at the Lindsell Train Investment Trust (LSE: LTI). In its latest update, the trust put its NAV at £1,057 per share. A quick look at the share price shows it at £1,595 as I write, and that’s a massive 51% premium to NAV.
But that’s nothing. Lindsell Train shares reached an exuberant bubble valuation of £2,030 in June, putting the premium up at 92% at its peak. Who says the market always reacts rationally to all available information, eh?
Some sense has since entered the market and the price has partially deflated. But a 51% premium still seems inexplicable to me. When you buy a share, you acquire the ownership of assets valued at £1,057. So why do people pay £1,595 for that? And why on earth were they paying £2,030 a month ago?
It’s largely down to fund manager Nick Train, who seems to have taken on the mantle of favourite UK investing guru since Neil Woodford’s recent fall from grace. He is, undoubtedly, a talented investment manager — but I’m not paying a 51% markup for him to buy assets on my behalf.
I reckon Lindsell Train shares are still on an irrational fad rating, and I wouldn’t touch them until the price comes down a lot more.
Discount
Turning to Neil Woodford, his Woodford Patient Capital Trust (LSE: WPCT) has suffered badly of late. His misfortunes stem from the suspension of his Woodford Equity Income Fund, after a run of cash withdrawals used up much of its liquidity and made it pretty much impossible to satisfy expected new demands.
Now, that fund shouldn’t really affect the Woodford Patient Capital trust directly, though it does invest in some of the same unquoted and speculative assets. The big difference is there’s no such thing as cash withdrawals from an investment trust. All people can do is buy and sell the shares, which won’t affect the underlying asset value one jot.
And sell they have been, with a resulting fall in the share price and a boom in its discount to NAV. At its latest update, the trust’s shares were on a 33% discount, which is huge. That’s a very tempting discount, and I do think the trust is oversold now.
But I won’t buy it for two reasons. One is that it invests in “jam tomorrow” assets I wouldn’t buy directly. The other is it’s geared, with debt amounting to a gearing of 17% of NAV. That gearing is being reduced, but I don’t want anyone, not even Woodford, borrowing money to invest for me.
