What caught my eye this week.

I love this time of year. No, of course not the short, dark, dreary days. I spent a lot of my childhood in sunnier climes and the Seasonally Affected Depression is real.

But rather the sense of nothing pressing to do.

Granted this is a privilege, albeit the result of my choices.

I deliberately don’t have kids dragging me all over the place. I’ve literally made it my business not to have a stressful work life. I’m very grateful for my wider family life, but once Christmas is over it’s a week of limbo and I relish it.

There are pros and cons to this rather ascetic way of living, certainly. I can see for some it might appear a bit barren.

But it suits my unusual temperament, and importantly it isn’t hurting anyone.

Winter wonderland

That said, I have developed some seasonal routines.

For example I tend to do a bit of midwinter purging of junk and clutter. And while I don’t commit to strict New Year resolutions, I do try to think a little more about what I might do better next year.

Currently I’m minded to eat meat only twice a week, work harder to see farther-flung friends, and hunt for more ultra long-term holds for my portfolio.

We’ll see.

On the purging of junk front, I also love resetting my massive investing spreadsheet.

My sheet starts with ‘my number’ at the top of the top sheet. That’s driven by various sub-sheets that calculate the shifting value of my portfolio in real-time. These also remind me where all the skeletons are hidden what is on which platform, and throws out interesting statistics about my shifting exposures and returns.

Zeroing it all ready for a new year is for me a special kind of slightly Rain man-y pleasure.

I see some of you are scoffing at the back?

Yes of course a year is an arbitrary orbit of the sun. Indeed, neither the world nor the markets are magically transformed on 1 January. (Although in retrospect 2022 sure looks that way.) I agree it’s all mental accounting and biases.

But hey, I’m a (mental) human and I am biased. And I can’t wait to delete the negative numbers and reset the counters.

Beans, beans, they’re good for your heart

Many years ago I met the best-selling author Robbie Burns of Naked Trader fame. We talked about investing.

Robbie was dismayed about my Buffett-y habit of averaging down on my losers:

“Why would you want to stare at your failed trades all day? It’s depressing. I get rid of them.”

I thought Burns’ advice was ridiculous at the time. But now I think it’s more wise than not.

Sometimes you have to learn a lot of complexity to realize some simple truths.

In 2023 I’ll feel happier about my active investing – and I suspect I’ll do better accordingly – because I (hopefully) won’t have to keep seeing (and reacting to) how I’m lagging the market year-to-date over an arbitrary time period in a portfolio that can’t sensibly be said to be winning or losing over anything less than at least five years, at least not without luck looming large.

Agreed: this is intensely stupid. But it’s hard won self-awareness too.

I’ll be working on that flaw in 2023, as I cook my beans instead of a pork chop and try yet again to tie down some much busier friend for a weekend away.

Maybe you’re a sensible passive investor and you already have more time to devote to the most important things in your life?

Regardless: what will you be doing more or less of, investing or otherwise?

Let us know in the comments below. And happy new year!

[continue reading…]

What caught my eye this week.

Well, it looks like we are gonna make it. No, not in the sense of the crypto mania catchphase (wagmi), which already feels about as relevant as a minstrel who verily does doth his bonnet to such tomfoolery.

But rather, it’s nearly Christmas and a lousy year for investors is coming to an end.

Actually, I’ve kind of lost track of how Monevator readers feel about their portfolios in 2022.

When I was bemoaning my active strategy having blown up in the first-half of the year, sensible world tracker owners and LifeStrategy players largely shrugged their shoulders.

British passive investors and even many UK-focused stock pickers were doing fine – the former helped by currency gains, the latter by tech stocks being as rare on the London market as a Brexit benefit.

However it feels like value destruction has now reached into even those doughty portfolios.

In particular the bond blow-up has caused more emotional distress than I can remember equities ever doling out. (To reiterate, today’s pain with high-quality government bonds is literally tomorrow’s gain. Okay, or maybe the day after.)

Indeed by September Bloomberg was estimating the carnage of the combined crash in equities and bonds had wiped out $36 trillion in wealth. That’s worse than 2008.

Still, a few readers with very unusual portfolios occasionally chime in that they’re doing fine.

Genuinely: good for them!

But remember, most if not all portfolios that were unusually successful in 2022 won’t have delivered the returns you chalked up last year. Or in most previous years, for that matter.

That’s not a criticism. Portfolios are personal things, and higher returns aren’t everything. Some people prefer lower volatility, say, or maybe more income now for lower future gains. But it is a reality check.

Regardless, I’d have loved a slab of what they’ve been eating this year, and unlike my co-blogger I’m violently agnostic about how people go about investing.

Last Christmas

Investing is a long-term game, with results best measured over many years.

That’s as true when meme stock traders are making us feel like losers in a bullish year as when someone with, for example, a permanent 25% allocation to gold is beating a bear market.

For my part, my ten-year dalliance with growth stocks (I began life more as an opportunistic value seeking curmudgeon) finally caught up with me.

Despite suspecting the sell-off in highly-rated US stocks in late 2021 was an early portent, I began buying those fallen darlings. Funded mostly by selling cheap UK equities that I’d previously in-part reallocated into.

It’s hard to imagine a worse move, except to compound it by not cutting bait sooner as the market continued to go against me. Instead I dribbled out of my positions, my portfolio bleeding.

The result is that even after shifting a huge chunk of my portfolio to ‘lower volatility’ assets fairly early in 2022 (as a response to my upcoming remortgaging uncertainty) and the growth rout finally stabilizing, I’m well behind my benchmarks this year. And it’s not like they’re looking very healthy, either.

Of course it didn’t help, again, that the lower volatility assets I’d finally acquired – especially UK government bonds – proceeded to swan dive, then turned to full-on synchronised swimming drowning in the wake of Liz Truss’ Mini Budget.

That’s been the story of my 2022 in a nutshell. Get your tiny violins out!

Monevator was noting inflation was a potential threat as far back as December 2021. Expectations then were still for interest rates to go to about 1% by the end of 2022.

Yet I (re)allocated far too much to rate sensitive ‘long duration’ stocks regardless.

And even though we were early in warning readers to stress test your mortgages, there was nothing much I could do with mine (reminder: unusual circumstances1) until my remortgaging window opened.

Which it finally did… post-Truss. My monthly payments are set to near-triple in the new year.

Fairytale Of New York

If you live by the sword, you die by the sword. Active investing has been good to me overall, but in 2022 I screwed up.

Nothing even half-fatal, but also not something I can blame on the flapping of Black Swans, with the possible exception of the war in Ukraine.

The signs were there, and my game for years has been to act on them. But this year I’ve been more Harry the Hoofer than Lionel Messi. My only consolation is almost all the stockpickers I know or follow are also in the relegation zone.

It’s rarely a good idea to do a deep rethink strategy in the middle of a funk, but I am wondering if it’s finally time to end my longstanding ultra-active investing experiment – I trade something most days – to go back to the sleepier buy-and-hold style where I made my bones.

Keen readers might find out in our upcoming membership service in 2023. And the rest of you will be spared too much more self-indulgent bewailing.

(I’m mostly sharing to show we’re all in the same boat, grumpy pants, but feel free to snicker.)

Rockin’ Around The Christmas Tree

I guess there have been a couple of reasons to be cheerful in 2022, if you squint a bit.

Covid as a threat to life has mostly retreated for most of us, as best we can tell.

And UK politics currently looks more stable, albeit that’s a bit like an 18th Century surgeon reassuring a patient that the gangrene has been arrested now their leg has been chopped off.

But otherwise: is it hyperbole to say it’s been another bummer of a year?

I know – it feels like every year has been a duff one recently. But war in Europe, an inflation surge, widespread strikes, rising energy bills, a stock market crash and bond market implosion, political chaos, the economic consequences of Brexit finally coming home…

…it could certainly be worse, but it’s not just me, is it?

As ever reading has been a comfort. Both for its practical insights and on the grounds that when you see what others have gone through, you take everything less personally.

Here are a few from this year that would make great last-minute presents.

Richer, Wiser, Happier by William Green

Ostensibly a recap of various investors who found ways to best the market – including Vanguard founder Jack Bogle, who saw an investor could do better than most by simply making peace with it – William Green’s book also has a lot of wisdom on living tucked into its pages.

How to Fund the Life You Want by Powell and Hollow

My co-blogger The Accumulator raved in his recent review: “If I was starting from scratch, this is the UK personal finance book I’d want to read first”. He’s not an ebullient chap at the best of times, so I’d be inclined to believe him.

The Power Law by Sebastian Mallaby

After More Money Than God, his previous work on hedge funds, I knew the Mallaby treatment applied to venture capital was just what my doctor ordered. A deep dive into an opaque industry, Mallaby should be working on a new edition given how things turned south for the sector in 2022.

The Psychology of Money by Morgan Housel

Okay, this was a re-read. But Morgan Housel’s two-year old treatise on the ways money acts on our thinking and in our lives has sold two million copies for a reason. Brain food for anyone in your life.

The Man from the Future by Ananyo Bhattacharya

I think this also came out in 2021. Never mind, I’ve been in awe of von Neumann since I came across his work as a student and this book reminded me why. One of a genius generation of Hungarians who US colleagues dubbed The Martians, so brilliant was ‘Johnny’ that even the Martians thought he must be a time traveler.

All I Want For Christmas Is You

And that’ll do it for Monevator in 2022.

Actually, not quite – checking the calendar I see the next Weekend Reading I plan to send out will be on Saturday 31 December.

But that strange period between Christmas and New Year’s Day always feels out of time to me. It’s perhaps my favourite week of the year.

It’s been an odd year for the site, too, incidentally, and you can expect some changes in 2023.

Far more people now read new Monevator articles on email than on the web (subscribe if you haven’t) and we were hit by some kind of Google algorithm change about 18 months ago that has further flattened website traffic.

One result is we’ll probably de-cloak and highlight our identities soon, to try to convince our Google overlords that we’re not nefarious swindlers.

Do please curb your enthusiasm.

We’re also finally going to roll out some sort of membership/paywall offering.

Internet display advertising continues to dwindle. And despite what people keep telling us, affiliate sales don’t do much around here either – probably because we’ve trained or cultivated an audience of proud skinflints, but also because I refuse to run most stuff that would make more money (despite what the house troll complains).

Fear not! Monevator will mostly remain a free site and newsletter; we’ll just be hiving off a few morsels for those who are willing to chuck us a few quid.

At times this blog cost me money to keep going this year, which after 17 years and a lot of kind reviews is a bit ridiculous. Moreover it badly needs a redesign, which needs more funding. 2008 chic can only last for so long.

Finally – whisper it – but I think we’re going to get the Monevator book out at last in 2023. It’s written. It’s down to me to buckle down to the faff of publishing.

With a schedule of investing-related treats like that to come, who needs a stock market rally, eh?

Thanks for sticking with our long and deep posts in an ever more bite-sized and TikTok-ified world. We honestly try.

Merry Christmas, and a happy new year to you all.

p.s. Bumper list of links this week to get you through the holidays. Enjoy!

1. Effectively it means I can’t go elsewhere, though knowing now how my bank’s remortgaging works it turns out I could have paid a charge and remortgaged early. [↩]

Many investors are unnerved by investment trust discounts and premiums. But the concepts involved are quite simple. And assuming you’re not – sensibly enough – a pure index fund investor1 – discounts and premiums shouldn’t put you off these interesting shares.

Equally, not understanding the difference between discounts and premiums can cost you money. It’s all too easy to be confused, as comments over the years on Monevator have revealed.

My previous articles on investment trusts should give you primer on the basics if you need it.

Today I’ll focus on discounts and premiums.

Investment trusts on sale

For active investors – or even ‘passive’ investors in the old-fashioned sense of buying and tucking away funds for the long-term – now could be a propitious time to look into these investment vehicles.

Recent data from the Association of Investment Companies (AIC) has 37 out of the 38 investment trust sectors trading at a discount:

“Since the beginning of the year the discount of the average investment company has widened more than 10 percentage points – from 3.6% on 31 December 2021 to 14.3% on 18 November 2022.

With almost all investment company sectors on a discount, the Association has published a list of average discounts across all equity and alternative sectors.

Out of 38 sectors, only the Hedge Funds sector trades at a premium, of 3.8%. The sector is one of this year’s best-performing, with several of its constituents delivering for investors in turbulent times, the AIC said.

The most deeply discounted equity sector is North America, on a 26.5% discount, followed by India on a 14.9% discount and Global Emerging Markets on 12.4%.

Among equity sectors, AIC figures show the biggest discount changes in 2022 have been in the Biotechnology & Healthcare and Technology & Media sectors, where discounts have widened by 9.2 and 8.5 percentage points respectively.”

As a naughty active investor (in contrast to my passive investing co-blogger) I love rummaging around in the investment trust bargain basement.

And as a long-time plunger in such markets, now feels like as good a time as any to get more than you paid for when you buy an investment trust.

But what exactly is a discount, and why should you pay attention?

Let’s start at the beginning.

What does your investment trust own?

We all (now) know that an investment trust is a company that purchases assets to hold or trade.

Such assets could include equities, property, bonds, or even exotic fare like farmland or art. The specific assets held will depend on the trust’s stated investment objective. (Or mandate, in the jargon.)

When we buy shares in a particular investment trust, we become part-owners in the trust. Effectively we then have part-ownership of those underlying assets.

Our slice of the pie depends on the percentage of the trust’s total shares outstanding that we own.

Most of us will only ever own a few thousand shares in an investment trust. But it’s the same principle, whether you hold 0.001% or 10% of the trust’s shares.

For example, equity income investment trusts own shares in large blue chip companies that pay healthy dividend yields.

As a shareholder in such a trust, you’ll typically be paid your proportion of the dividend income generated by those blue chip equities – minus the trust’s fees, hidden costs, and any income it retains for future use.

Equity income trusts appeal to active investors who want a diversified income. But as a shareholder, you’ll also benefit (or suffer) from the rise and fall in the value of the shares your trust owns.

Similarly, you might buy an investment trust that owns property or miners or bonds – or pretty much anything else you can think of.

You might even buy an investment trust because you hope think the manager is an especially skilled one.

They may be fishing from the same general pool of shares you could buy for yourself – or that you could invest in via a tracker fund – but you may believe the trust’s manager is more skillful at picking winners. And so you hope their trust will beat the market.

Net assets

In any case, the trust will own a lot of stuff, which are called its assets.

The trust may also have debt (also known as gearing). These borrowings would need to be repaid out of assets if the trust were ever to be wound up, before its owners (the trust’s shareholders) could divide whatever was left.

Therefore:

Net asset value (NAV) = Total trust assets minus any debt

How to calculate the net asset value per share

While they amount to the same thing, it’s often easier to think about what portion of the trust’s net assets each individual share is theoretically entitled to, rather to work off the whole trust’s market value.

Let’s consider an example.

Imagine the world’s simplest investment trust, Monevator Investments PLC.

This recklessly mismanaged operation owns shares in just two companies, TI Corp and TA Inc. (Hey, it’s good to hedge your bets!)

Let’s say shares in TI Corp are trading at £10 and TA Inc is at £12, and that the trust owns 100,000 shares of TI Corp, and 50,000 shares of TA Inc.

The trust’s TI Corp holding is worth £10 x 100,000 = £1 million

Its TA Inc holding is worth £12 x 50,000 = £600,000

The Monevator trust has zero debts.

Therefore, the net assets of Monevator Investments PLC is £1.6 million.

Now, let’s say this trust has one million shares in issue.

Net assets per share = £1.6 million / 1 million = 160p per share.

Each share is effectively a claim on 160p worth of assets owned by Monevator Investments.

So far so simple!

Investment trust share price versus NAV

Any share is worth whatever someone will pay for it. There’s no right or wrong value for any particular share that you can calculate with a formula – in the sense that whatever value you come up with, it’s irrelevant if nobody will pay that for it today.

This is why share prices are so volatile. The market is constantly trying to agree upon the correct value of every company.

Consider a giant drug maker like GlaxoSmithKline. Calculating its ‘correct’ valuation is likely impossible. There are many brands, new ventures, potential disasters and expired patients patents that can impact its profits from quarter-to-quarter.

Fluctuating sentiment also continually alters the multiple (the P/E ratio) that investors are prepared to pay for a claim on Glaxo’s profits.

Over the long-term our valuation estimate might prove to be approximately right. But in the short-term it’ll be precisely wrong – except by luck.

In contrast we can immediately see what a Glaxo share is worth right now by pulling up its share price on the Internet.

You might believe GlaxoSmithKline is worth £20 a share. But as I type this the market says it’s worth £14.55. That’s what someone will pay for its shares right now.

If you’re confident you’re right, you might buy Glaxo shares as they’re trading for less than your valuation and wait for the market to come around to your thinking. (That, in a nutshell, is stockpicking. But that’s for another day…)

Investment trust valuation is a little different

With an investment trust like Monevator Investments PLC, it’s usually very easy to work out its value. You simply look at its assets and debts, calculate the NAV like we did above, and hey presto – you’ve got its value.

This is true of any investment trust that holds a basket of liquid and quoted securities, where you can just call up the latest price of each investment. (I’m ignoring for now more complicated trusts that invest in unquoted or illiquid assets). 

You don’t even have to calculate the NAV per share, unless you want to double-check something. Resources like the AIC’s website collates the stats for you. Trusts also regularly publish their NAVs via the London Stock Exchange’s RNS service.

Now before anyone objects, it’s true that the listed securities owned by the trust might be worth more or less than what the market is pricing them at today, and hence what’s reflected in the NAV.

That takes us back to the Glaxo discussion we just had.

But the point is a trust could in theory dump all its Glaxo shares at today’s market price.2 And that by doing so for all its holdings and then paying off the debt, it would (after costs) be left with that NAV in cash.

In other words, for mainstream investment trusts the NAV is not subjective or an opinion. It’s a fact.

Discounts, premiums, and NAVs

Despite this certainty, it’s often the case that the share price of an investment trust trades at less than its NAV per share.

And this may be an opportunity. Price is what you pay but value is what you get, to quote Warren Buffett.

For instance, Monevator Investments may trade for £1.20 a share, despite anyone with a calculator being able to see its NAV per share is £1.60.

So in this case, a buyer is getting £1.60 of underlying assets for just £1.20.

Bargain! The share is trading at a discount to NAV:

The discount is (£1.60-£1.20)/£1.60 = 25%

The general idea is that you get more for your money when you invest at a discount. Hopefully in time the discount will narrow, pulling the share price up towards the NAV and amplifying your returns.

Note there’s no guarantee this will happen though. (If there was, discounts probably wouldn’t exist.)

Sometimes trusts can languish on discounts indefinitely. Trusts may even be wound-up as a consequence. Doing so almost always closes the discount, but it typically comes after a period where whatever caused the discount (lousy returns, say) have already done a bit of damage.

Discounts can also be great for income investors who buy and hold, since the money you spend on your shares buys you more of the trust’s income generating assets.

For example, suppose a trust trading at £1 per share – the same as its NAV of 100p – owns a portfolio of blue chips that generates a 3% yield. If the share price falls to 90p to create a 10% discount to an unchanged NAV, then new buyers will enjoy a higher 3.33% yield from the trust. (That is, 100/90*3).

Premium pricing

Less often you’ll find a trust priced greater than its NAV. This is more common in bull markets, or for a popular new launch.

For instance let’s say Monevator Investments is trading at £1.80. Net assets are still £1.60 per share.

Then the premium is (£1.80-£1.60)/£1.60 = 12.5%

Now you’re paying 12.5% above what the shares would be worth if everything was sold tomorrow.

Probably not such a good deal!

Also, what I said above about discounts boosting your income is countered with premiums. They reduce the yield from the trust’s underlying investments.

Paying premiums can be costly

For one very illuminating example, when I wrote the first version of this article in 2014 Fundsmith’s then-new emerging market trust traded at a premium to NAV. This was despite its initial assets being merely cash.

You were paying, say, £1.05 to buy £1.

People wanted to own the shares as a bet that fund manager Terry Smith’s stock picking prowess would extend to emerging markets. However that didn’t really pan out, the shares slipped to a discount, and in 2022 the trust was wound up.

So beware hype and premiums kids!

For another example, popular fund manager Nick Train’s Lindsell Train investment trust was trading at a premium of nearly 100% a few years ago.

In that instance investors were betting that the NAV was misstated. This line of thinking was possible because Lindsell Train’s largest asset is a holding in Train’s own investment company, also called Lindsell Train.

With unlisted investments like that, the pricing certainty I talked about doesn’t hold. (This is most commonly seen with private and venture capital trusts.) Hence you can’t be sure of the NAV.

To his credit, Train repeatedly warned investors they were probably paying too much for the trust’s shares. And for the record the share price has halved since those days. Indeed last month you could even buy the shares at a discount.

Sometimes a small premium is the price of entry to a very popular trust, particularly one that has some kind of discount control mechanism allied to its strong appeal.

For instance, Capital Gearing Trust is usually priced just over NAV.

More egregiously, infrastructure trusts have tended to trade at double-digit premiums, although this year these have finally collapsed as bond yields have risen, reducing their relative attractiveness.

Personally I’d never pay more than a couple of percent as a premium. And then only very rarely.

A few final tips on discounts and premiums

Here’s a few things you may be wondering about – or that maybe you should be wondering about if you’re not:

• Fund factsheets and data suppliers usually give the discount or premium as a percentage figure.

• Typically a negative number – for example -5% or (5%) – indicates the level of discount to NAV.

• In contrast a positive percentage indicates a premium to NAV.

• As mentioned, investment trusts must release regular RNS press releases to the stock market. You can find these on various websites. I always check these for the latest NAV per share, and I do the discount/premium calculations for myself. Sometimes the online data sources and factsheets are out of date.

• Another reason to check is that different data suppliers often treat debt and accrued income differently in their calculations. (For example, one may count debt on the balance sheet at its face value, while another calculates its impact on NAV based on what it would cost to pay off the debt today).

• Why do investment trusts trade at discounts? And why on Earth would anyone pay more for a trust than its assets are worth? Great questions, that I’ve previously attempted to answer.

Opportunity knocks

The whole discounts and premiums malarkey was often pinned by old-school Independent Financial Advisers as the reason they put their customers’ money into unit trusts rather than investment trusts.

Clients were too easily confused, they said. (“Honest guv, nothing to do with the commission that unit trusts kicked back, but investment trusts could not…“)

Yet confusion, panic, and mispricing can be your friend if you’re involved in the quixotic (and generally ill-advised) game of active investing.

To that end, I think investment trusts and their mercurial discounts offer a dedicated active investor an interesting halfway house between open-ended funds and ETFs and the outright stockpicking of single company shares.

And after a long sell-off in shares that have hit investment trusts pretty hard, discounts abound.

If you’re an active investor for your sins, happy hunting!

1. Investment trusts are companies that invest in other companies, so in effect they are actively managed funds. Passive index fund investors prefer the warm comfort of low fees and getting the market return to the potential (but in practice rare) upside from active management. They’d therefore choose trackers and ETFs over investment trusts. [↩]
2. In practice this might move the share price if it owned a lot relative to the company’s outstanding share count. Again: details! [↩]