INVESTMENT TRUSTS AND THE DISCOUNT
This is the difficult bit. Get through this and it's clear blue skies and pots of money.
You will remember from Seminar Two (it will be engraved on your memory) , that when you buy or sell "unit trusts" you will always get the underlying value of the units.
End of story. Unit Trusts are very simple,.
Investment Trusts are different!
With investment trusts you are buying shares in the company, not in the underlying value of the company's assets.
This underlying value is called the NAV. This is short for Net Asset Value.
To illustrate the importance of the Net Asset Value, let us go back to Dundee in the 1870s.
It's a year or so after the Alliance Trust was formed by merchants financing emigrant wagon trains on the Oregon Trail, and mortgaging sugar plantations in Hawaii.
There's a cold wind blowing in from the Firth of Tay (we can safely say this I think) and canny Angus calls on fellow merchant Donald, who he knows is in urgent need of cash.
Angus
I hear you want to sell those shares you bought in the Alliance Trust, Donald
Donald
Aye I do.
Angus
Well now, I'll give you eighty pence each for them.
Donald
Eighty pence! Why they cost me a pound each and they're worth at least one twenty by now, according to that manager we have in a garret with only a wee candle and no coals.
Angus
Maybe, but there's been a terrible lot of wagon trains burned by Indians, I'm hearing, and a sugar cane blight in Hawaii.
Donald
But eighty pence! Why I'd be selling at a discount to NAV!
Angus
Aye, aye, but you need the money and I'm the only buyer around I'm thinking.
(Sound of newsboy out in the street)
Newsboy
Evening Telegraph! Evening Telegraph! Wagon trains saved from redskins in Oregon! Sugar blight rumour unfounded! Alliance Trust's manager reveals net asset value of each share now one pound fifty.
Donald
NAV of one pound fifty a share!
Angus
Ah well, I'm a generous man so I'll give ye a pound a share Donald, a pound a share.
Donald
Didn't you hear? They're worth one pound fifty each!
Angus
Not to me they're not.
Donald
But man I need the money!
Angus
Do ye really really need it Donald?
Donald
Aye I do, Angus.
Angus
Then on mature consideration I'll revise my offer
Donald
You're a good friend Angus.
Angus
To ninety pence a share.
Donald
(Forgetting to be Scotch)
You utter bastard.
(The newsboy is heard outside again)
Newsboy
Evening Telegraph! Special Edition! Wee Willie Killicrankie of Perth is buying Alliance Trust shares! Wee Willie is buying at one sixty!
Donald
A buyer at one sixty! I'm saved!
Angus
One sixty! I’m having to pay a premium! (Digs deep in his sporran and counts out groats) I'll take eleven.
Hoot hoot!
What the above exchange illustrates is that:
When you buy Investment Trust shares, you are buying shares in the company, not in the underlying assets.
And the share price will be governed, partly at least, by the number of people who want to buy them.
This means that bargains are sometimes to be found!
Let's find a bargain here and now!
One of the most successful of the "unit trusts" is Invesco Perpetual High Income. I mentioned it in Seminar 3. It has one of Britain's outstanding fund managers, Neil Woodford.
You can buy these units today and you will get excellent value. They are £285.44 pence a share (you will pay fractionally more to cover costs) and because of the falls in the markets last year they are yielding 4.25%.
The fund has a 5% entry fee (which with Moneybox Man's advice can be avoided, see Seminar 3) and 1.5% a year running cost (you can get some of this back as described in Seminar 3)
However!
Let us wander northwards again, this time to Edinburgh, to the long established (1889) Edinburgh Investment Trust.
The trust has performed faithfully down the years, like most of its ilk. But it has not been exciting. Last year, disappointed by its performance, the directors appointed a new manager.
Not a man in a garret with a candle and no coals but...
Neil Woodford of Invesco Perpetual!
Yes, they took out a management contract with Invesco Perpetual, who quite like having a few investment trusts in their stable, and who used the lure of Neil Woodford to entice the dour Edinburgh Trust in.
Shares in Edinburgh Investment Trust are today 355p.
But the NAV of the shares is 390.95p.
The shares are therefore at a discount of 9.2%.
You can thus buy just over £109 worth of shares for every £100 pound you spend! And you get Neil Woodford! And you get a yield of 4.4%!
How's that for a bargain?
Looking at the figures:
You want Neil Woodford to manage your money, and you have £5,000.
You can either:
Invest in Invesco Perpetual High Income (via a discount broker), and get £5,000 of assets yielding 4.25%
Invest in Edinburgh Investment Trust (via an on line broker for £12.50) and get £5,494 worth of assets and a yield of 4.4%
With the Edinburgh Trust you also have:
The possibility that with Neil Woodford as manager, the discount on the NAV will continue to close - and thus give an extra fillip to the share price.
Lower management fees - 0.6% plus performance bonus* with Edinburgh, compared to at least 1% with Invesco Perpetual High Income Fund.
More examples from Moneybox Man to come!
* This is the deal Edinburgh's canny directors did with Invesco Perpetual:
Invesco Perpetual is entitled to a management fee which will be 0.6% of the Funds market capitalisation. If the NAV (with debt at par) out-performs the FTSE All-Share Index (Total Return) by 1.25% per annum on a three year rolling basis, Invesco Perpetual will additionally receive a performance fee of 15% of the amount of the above-target out-performance, up to a maximum of 1% of net assets in any one year. The management agreement provides for three months notice of termination, subject to a minimum initial period of 12 months.
