Should I buy a trust on a premium or an open-ended fund?
We help a reader with a question about investment trust discounts and premiums.
22nd July 2019 12:29
by Kyle Caldwell from interactive investor
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We help a reader with a question about investment trust discounts and premiums.
When buying an investment trust, the share price discount or premium may reflect on returns. If I were to buy a trust because of its discounted price, I would be worried about when its performance would turn around for the better. In contrast, a fund's price reflects its performance, so I don't have to worry about the implications of a discount or premium.
For example, Lindsell Train investment trust trades at a premium of 90%, while the LF Lindsell Train UK Equity fund's performance is quite similar, but no premium is involved. Shall I take a chance and buy the trust at a high premium, or buy the fund without the worry of paying over the odds?
Chan Shah, by email.
Money Observer replies: It's not generally sensible to buy investment trusts at any more than a modest premium – typically we would suggest no more than 5% – because of the natural tendency of a share price to revert towards the value of underlying assets over time.
In a recent Ask Money letter, we explained the situation with Lindsell Train. If you want exposure to Nick Train's undoubted expertise as a manager, the fund is the obvious choice at present. However, funds may come with their own drawbacks, as the recent suspension of Woodford Equity Income demonstrates.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.