Investment Trust Price Discounts

Abstract

The ‘problem’ of the divergence between the market value of shares in a closed-end fund (investment trust) and the valuation of their assets is one that has led to a good deal of research and comment over a period of many years (see the references cited in our second section). The issue has also, perhaps, a broader interest other than simply to those interested in mutual funds. For investment trusts, unlike other companies, there exists a very ‘clear’ valuation of the company’s assets. The difference between the value of these assets and the share price, the former usually being greater than the latter, is clearly quantified. There may well exist large premiums/discounts on the shares of other quoted companies which are much less ‘visible’ because of the lack of a precise, or even approximately precise, value of their assets. The sharp movement, usually an increase, in the share price of companies being taken over, testifies to a possible wide divergence in asset value and share price. Investment trusts present an opportunity to investigate the movements in this ‘discrepancy’. More plainly in an efficient market without frictions the existence of the premium/discount is impossible. Given the presence in the stock market of highly informed and well resourced agents, the existence of a large market information inefficiency is highly unlikely.