Money: Trusts may be down, but they're far from out
Sunday 02 November 1997
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.
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