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.

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