Investment trust discounts exceed levels seen during financial crisis

Our expert gives his view on investment trust discounts during times of uncertainty.

The ongoing uncertainty – economically, socially, and emotionally – surrounding the coronavirus pandemic has wreaked havoc on our lives and global markets. 

The average investment trust discount – the ultimate measure of stock market sentiment – has now exceeded where it was at its widest point during the financial crisis over a decade ago. At its widest, the average investment trust discount hit 17.6%, on 31 December 2008. It is currently 18.4%, as at 23 March 2020, according to AIC website data using Morningstar.

Dzmitry Lipski, Head of Fund Research, interactive investor says: “Investment trusts are the ultimate barometer of sentiment, and with our daily lives both on hold and under enormous uncertainty, rarely have markets mirrored so closely this grim social, emotional and economic reality.  The average investment trust discount has widened from what was probably an all-time low of 1.3% at the end of December 2019, and it was just 5.5% at the end of February 2020. Barely a month later, we are in the high teens.

“Discounts have widened across the board, but as we saw during the financial crisis, UK Commercial Property trusts have posted especially steep declines. The average Property: UK Commercial investment trust discount is currently 32.5% at 23 March 2020. The average Private Equity discount is currently 46.4% at 23 March 2020. These went wider still during the financial crisis.

“Discounts may well have further to widen, and investors should never, ever, buy on the basis of discounts alone (or sell, for that matter). But it is equally true that investment trusts are now much cheaper than they have been in years. In these difficult times, the best thing to do is try not to panic, as this can lead to poor decisions – and life is tough enough right now without adding to it in your portfolio.”

It should also be noted that one of the reasons discounts are so wide is the market prices have fallen in these volatile markets but the Net Asset Values haven’t always moved, as not all investment trusts release their Net Asset Values daily.  For some investment trusts it will take a while for discounts to catch up.