Investment trusts

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6. Discounts: the share price of ITs

Shares in an IT are quoted shares just like those of any other company. They go up and down, and the success of your investment will depend on the price at which you buy and the price at which you sell.

The most important influence on its share price will be the performance of the companies in its portfolio, but unlike unit trusts, whose price is pegged exactly to the value of its investments, an IT's share price is affected by market sentiment:

• If the market generally is nervous about emerging markets, an IT specialising in South American stocks will not be popular.
• If the market decides that the small technology stocks sector is the place to be, an IT specialising in that sector will benefit.

The consequence of market sentiment is that an IT's share price can dip below, or rise above, its net asset value. Net asset value (NAV) simply means the value of its portfolio divided by the number of shares in issue, less borrowings.

• An IT with a NAV of 100p whose share price is 92p is said to be trading at a discount of 8%
• If the same IT had a share price of 109p, it would be trading at a premium of 9% or +9.

Click here for the Baillie Gifford Japan IT share price movements with it's NAV and discount over ten years.

Note that volatility is one of the key differences between a IT and a unit trust (UT). Where ITs are valued by market forces, UTs are valued by a strict mathematical computation. Every day the UT divides the total value of its fund by the number of units in issue, and offers to issue units or cancel existing ones at that price. As a rule, UT unit prices tend to be more predictable and less volatile that IT share prices.

Specialist ITs tend to be more volatile than general ones because, by their very nature, they are more likely to be affected by what the market feels about their area of specialisation.

1. What are investment trusts? 2. What does an IT do? 3. Difference from unit trusts 4. IT specialisation 5. Tax advantages 6. Discounts: the share price of ITs 7. Gearing 8. Split capital trusts 9. Warrants 10. Ways of investing in an IT 11. Factors to consider when choosing an IT 12. Where to find information about ITs 13. Conclusion