2 investment trust ideas trading at a discount

The last few years have been tough for investment trusts. Rising interest rates made their income look less attractive than they once did. Active managers have also struggled in markets led by just a few big stocks and discount rates have been on the rise.

What are investment trust discounts, and do they matter?

Unlike funds, investment trusts can trade at a premium or discount to their underlying investments (what they’re actually worth).

When they’re struggling, their price tends to fall faster than the value of the investments they own (or not rise as quickly), and a discount can open up.

This year we’ve seen some fairly hefty discounts on what we believe are some good quality investment trusts.

You have to take discounts with a pinch of salt though. That’s because sometimes they’re ‘cheaper’ for a good reason – for example, their prospects might not be as strong.

Sometimes, however, discounts open because of specific market dynamics. And if you think the underlying investments have potential to perform going forward, this can present an opportunity to buy shares in some good quality investments (like shares, bonds or something more tangible like roads, hospitals or wind farms) at an attractive price.

Which investment trusts have the biggest discounts?

Discounts on many investment trusts blew out during 2023 as interest rates rose, and lots still remain quite large.

Within ‘equity’ investment trusts, Global Multi Asset funds had the biggest average discounts at the end of November and smaller companies trusts generally also had big discounts.

The smallest discounts, as you might predict, were on the North America trusts.

Renewable infrastructure trusts, which invest in things like wind and solar farms, had discounts ranging from 20% to 42%.

Do discounts also mean you’re paying less for more income?

Lots of these trusts are still paying out reliable income streams.

As the prices of the trusts has fallen, this has had the interesting dynamic of increasing their yields. You can also think of this as buying the income stream at a cheaper price.

This can be especially attractive in sectors like renewable infrastructure where yields of 7-10% are currently on offer from some big, well-managed trusts.

What’s next for discounts?

We can’t predict what discounts will do going forward – after all they could tighten or even widen further.

That means you should only buy investment trusts on a discount if you’re prepared to hold them for the long term – that’s at least five years.

When you’re buying discounted investment trusts, you need to be patient and allow time for discounts to narrow, and of course there is no guarantee this will happen at all.

If you find current discount levels attractive and are prepared to be patient, here are a couple of trusts that we think are worth exploring.

2 investment trust ideas trading on discounts

Remember, investing in these trusts isn’t right for everyone. Investors should only invest if the trust’s objectives align with their own, and there’s a specific need for the type of investment being made.

You should understand the specific risks of a trust before investing, and make sure any new investment forms part of a diversified portfolio. Closed-ended funds can trade at a discount or premium to the net asset value (NAV).

This isn’t personal advice or a recommendation to invest. Remember all investments and any income they produce can fall as well as rise in value, so you could get back less than you invested. Past performance isn’t a guide to future returns. If you’re not sure an investment is right for you, speak to a financial adviser.