Money: Trusts may be down, but they're far from out

In recent days many people's thoughts have gone back to 1987 and, perhaps, to Dad's Army. We are again faced with the choice between Private Fraser - "We're doomed!" - and Corporal Jones - "Don't panic!"

People's worst fears after Monday's fall on Wall Street have not materialised, but the mayhem was bound to make investors consider pressing the panic button. Price volatility is a measure of the risks of shares, and there has been volatility aplenty. However, investors looking at investment trusts should carefully consider the opportunities on offer.

There are differences between now and 1987, but it's still useful to look back. Overall the "discounts" on investment trusts - the difference between their share price and the value of underlying investments - widened. Buying a trust on a deeper-than-average discount can be very profitable. If its underlying portfolio does well and the discount narrows, investors should do better than with other investments. So widening discounts, while bad for trust holders, create opportunities.

In October 1987 the average discount for larger trusts widened by around 4 per cent. Everybody "knew" the Japanese market would fall furthest as it was the most over-valued. Eventually this view was right, but it took far longer than expected; the Tokyo market almost doubled between the crash and its December 1989 peak. Anyway, post-crash Japanese trusts were sold heavily, and went on to very wide discounts. An investor who bought into mainstream Japanese trusts then would have benefited from a strong stock market and a couple of trust takeovers; these also helped the discounts on remaining trusts.

This time round, the Asian market seems unpopular: small investors were net sellers of Far East unit trusts last month, and discounts on their investment trust cousins have already widened. Any wider discounts could give investors some very tempting opportunities.

So what should you buy? In current markets, differences in rating between quality stocks and "second liners" may be eroded. It makes sense to buy quality managements and quality brand names, which have much greater potential for narrowing discounts when people feel more cheerful again.

"Name names," you cry. The problem with making recommendations is that, with markets so volatile, it is hard to work out exactly what a trust's underlying asset value (NAV) is, and so what price you should pay. Until the dust settles, published NAVs have to be treated with a pinch of salt. Watch and wait.

People who already hold trusts should just hang on. Discounts move in cycles; they have widened recently, and could widen a bit more, but in the medium term they'll narrow.

Investment trusts are best viewed opportunistically, and the best time for investment trusts is when sentiment is at its worst and ratings are depressed.q Philip Middleton is investment trust analyst at Merrill Lynch.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
Phillips Idowu, Stella McCartney and Jessica Ennis
fashionMcCartney to continue designing Team GB Olympics kit until 2016
Sport
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
football
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
Farah returns to the track with something to prove
Commonwealth games
Life and Style
fashion Designs are part of feminist art project by a British student
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism