Investment trusts have been ignored for too long. They have many features that unit trusts do not possess and this makes investing in an investment trust far more exciting and potentially more profitable than unit trusts.
If you invest in “normal” collective investments such as life insurance funds, unit trusts or OEICs – then, if you invest £1, you purchase £1 worth of assets and your returns will depend solely on how those assets perform in the financial markets.
Investment Trusts are different
However, you can often buy investment trusts at a discount to net asset value, so unlike “normal” collective investments you have the potential to leverage the amount you have invested. Investing £10,000 into an investment trust at a 25% discount to net asset value provides you with assets whose asset value is £13,333.
Buying at that sort of discount means that you will have bought a “double beta” investment. Double beta means that the price of your investment trust will tend to double any increase in investment markets, and if the market falls, the loss of price (not value) will tend to be twice any market drop.
“Any investment trust at a discount of 25% or more deserves serious consideration” Jim Slater – The Zulu Principle.
I trust you realise that I am not going to give all my secrets of investment trust selection away – but at least I should provide you with a pointer for selecting the right investment trust.
So here it is: the price and discount fluctuation of investment trusts gives rise to anomalies in the financial markets. Over time the discount of individual investment trusts will fluctuate. If an investment trust discount widens and the discount is in excess of its average discount then this can be a “buying signal”, as investment trust discounts tend to normalise (return to the average) for a particular trust.
The same is true of the “premium” which is a situation where you pay more than the value of the assets of an investment trust because of the track record or manager or (as is happening in the market now) where you have a very high yield. Premiums will fluctuate also – this can also provide a “buy signal”
You will have gathered by now that investment trusts are not for the faint hearted, however they have the potential to produce above average and in some cases spectacular returns – if you choose the right time to buy and sell.
We believe that investment trusts should form part of all investment portfolios – but, before investing in investment trusts, seek out an investment trust specialist and take proper financial advice.
for more information on investment trust discounts and premiums (including a video) click the following link.
