Should You Buy an Investment Trust When it Trades at a Premium?

Demand and supply dictates the price of an investment trust's shares – and whether the shares trade at a discount or premium to the underlying value of the fund

J.P. Morgan Asset Management 13 February, 2015 | 12:04PM
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Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, as part of Morningstar’s Guide to Investment Trusts, JP Morgan’s Client Director, James Glover explains what it means for investors when a trust is trading at a discount or premium.

At the most basic level, discounts and premiums on investment trusts reflect supply and demand in the market. They are an important consideration for any investor but should be considered as one component of the overall purchasing decision when investing in trusts.

The rationale of buying on a discount is that if the asset class comes back into favour and/or the company outperforms, not only will investors potentially realise a benefit from the rise in the underlying net asset value, but they could also benefit from a tightening of the discount as the company share price moves towards net asset value. By comparison, buying a trust on a premium may reflect a particularly strong sentiment for the underlying asset class, or a willingness on the part of investors to pay for high quality management and proven investment results.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

J.P. Morgan Asset Management  is the investment arm of JPMorgan Chase & Co. and it is one of the largest active asset managers in the world.