The ability to ‘reserve’ a proportion of their income, and thereby smooth dividend payouts over time, has always been one of the most attractive features of investment trusts – this video explains why they merit serious consideration, particularly for the income-seeking investor.

Transcript

At any point in time, an investment trust will have a fixed number of shares in issue.

For that reason, the price of those shares is governed by two factors:

• the performance of the trust’s investments; and
• investor sentiment – or, in other words, the laws of supply and demand.

The more popular the trust is, the more expensive its shares will be … and vice versa.

When in-demand, a trust’s share price may be higher than its net asset value – or ‘NAV’ – and the trust is said to be trading at a ‘premium’.

There may also be times when a trust falls out of favour and its share price is lower than the value of its net assets, in which case it’s trading at a ‘discount’.

It’s important to establish whether you’re buying the assets in an investment trust for more or less than they’re worth. To establish whether a trust’s shares are trading at a premium or discount, consult the Association of Investment Companies database which will tell you both the NAV and the most recent closing price for the trust’s shares.

Trusts typically try to smooth out major discrepancies in their share price rating. If the trust is consistently trading at a premium, they will issue additional shares to satisfy investor demand. If demand is low and the share price has traded at a discount for some time, they may buy back some shares to reduce the excess supply.

Buying investment trust shares at a discount may well constitute a ‘bargain’; however it’s always wise to consider why that discount exists: is it, say, just a function of short-term negativity, or have investors identified a fundamental flaw in the strategy?

Similarly, paying a premium for a trust’s shares may be a wise move if its prospects look particularly strong.

Further research is likely to provide the answer.