Understanding discount control mechanisms
The closed-ended structure of investment trusts means they can trade at a premium or discount to the value of their NAV, typically influenced by investor demand for the shares.
Some trusts look to counteract a lingering discount by employing discount control mechanisms which act as a way to close that valuation gap if the discount gets too wide. These are not mandatory and nor are they always followed to the letter.
There are three main ways an investment trust will look to reduce the discount to its NAV, with the threshold anywhere between zero and 10% or sometimes higher.
Probably the most common approach is to buy back shares in the market. Reducing the number of shares in issue should boost the NAV attributable to the remaining shares.
Tender offers or redemptions, whereby the trust will allow shareholders to sell a proportion of their shares back to the company at either a fixed discount to NAV, or a price close to the NAV itself, are also employed.
Some funds have a fixed life or a continuation vote in place. These arrangements mean either a trust will only exist for a fixed period or it will allow shareholders to regularly vote for it to be wound up after which shareholders will be paid their share of the company’s assets at or close to NAV.