Longest period of double-digit discounts for 30 years presents investors with opportunity

Investment trusts have traded at double-digit discounts for an unprecedented period, according to research from the Association of Investment Companies (AIC).

The average investment trust, excluding 3i, currently trades at a discount of 14%. The average discount has been wider than 10% since September 2022, peaking at 19% in October 20231

This means that this period of double-digit discounts has lasted for 29 consecutive months, longer than any previous period of deep discounts since 1996. The second-longest period was between August 1998 and October 2000 (27 months), while the financial crisis saw double-digit discounts persist between September 2008 and September 2010 (25 months)2

But previous periods of double-digit discounts have ended with those discounts narrowing, contributing to strong returns. 

 
 

Further AIC research shows3 that the average investment trust excluding 3i returned 86.5% in five-year periods that began with double-digit discounts, compared to the 53.8% return achieved over five years when investing at discounts narrower than 10%.  

That’s equivalent to an annualised return of 13.3% over five years when investing at double-digit discounts, compared to 9.0% when investing at narrower discounts. 

Nick Britton, Research Director of the Association of Investment Companies (AIC), said: “Discounts can spell opportunity when it comes to investment trusts. Our research shows that investing at double-digit discounts is generally good for your pocket, and that message has clearly got through to activist investors like Saba. 

“The current period of double-digit discounts has been long, but it can’t last forever. Previous periods like this have ended with some combination of market recovery and corporate activity – and there’s no reason to think this one will be any different. 

 
 

“It can be hard to invest when sentiment is downbeat, but history shows this is usually the best time.” 

Source: theaic.co.uk / Morningstar. Ex 3i and VCTs. 

Experienced private investors are buying

A study of 212 experienced investment trust investors from Research in Finance4 suggests that they are attracted by the deep discounts on offer. These self-directed investors have been investing in trusts for an average of 16 years and have an average of £536,000 to invest. 

Of these investors, 32% expect to invest more in investment trusts over the next six months, 60% expect to invest the same, and only 8% expect to invest less. 

When the 32% who expect to invest more were asked why, 50% said it was because of attractive discounts or discounts widening. This was the fourth most commonly cited reason to buy more after the strong performance of certain trusts (59%), good/reliable dividends (51%) and having a more favourable view of trusts generally (51%). 

The opportunity to buy at a discount is seen as a benefit of investment trusts over open-ended funds by 62% of respondents to the survey. The only benefit more widely recognised was fund managers not being forced to sell assets to meet redemptions (64%). 

Abbie Hines-Lloyd, Associate Director of Research in Finance, said: “Discounts remain a significant factor in what makes investment trusts appealing to private investors, and that’s been the case ever since we launched this study nearly ten years ago. 

“Private investors recognise that discounts can offer value and opportunity, making it easy to assess when might be a good time to invest or grow a position. Our research shows that investors at an earlier stage in their investment journey are particularly open to utilising the opportunity discounts provide. However, it is important to note that stubborn discounts can be problematic for those who have already weathered several market cycles, and who may be more focused on cashing in their investment than seeking new buying opportunities.”

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