Many recent initial public offerings (IPOs) have resulted in early premiums, but investors need to beware that these can be deceptive and more often than not are driven by sentiment and popularity, according to industry experts.
As with anything you can’t guarantee that an investment company is going to go up or down after it lists, but over the last few years many have seen an immediate move to a premium.
“I can’t think of examples of trusts that went to a discount at IPO,” Ben Conway, senior fund manager at Hawksmoor, said.
“The reason is probably because there’s been such demand for assets for some time – that’s the function of the bull market we are in.
“So I can’t think of any investment trusts that have immediately gone to a discount after issue over the past five years. There may be some niche one where that happened but ones that have gone straight to a discount I don’t think have happened in this bull market.”
As well as the general bull market the sector has enjoyed for the past few years, the quality of issuance has been high.
He cites infrastructure specialists, property and specialist lenders as areas that have provided more income opportunities to the closed-ended space as “great issuance”.
However, those looking for trusts likely to make an instant return by rising to a premium, Monica Tepes, research analyst at Cantor Fitzgerald, says buying a big name manager is a good start. 
"If there’s one thing that can give you a bit of confidence generally is if you have new issues which are likely to be oversubscribed,” Tepes (pictured) said.
“Ultimately the price is a result of the demand and the supply for the shares so in theory if you have people that have been turned away or money that was turned away when the market was raised they may go and buy it in the market once the trust has been launched and that could push the premium up.
“The surest bet to go to a premium are issues that have high profile managers and if the issue is capped at a certain amount there is likely to be an oversubscription.”
However, just because an investment trust immediately goes to a premium does not mean it is destined to stay there.
Below FE Trustnet looks at two examples where trusts have gone to large premiums early on but are now at discounts.
While they may be the safest bet to make an early premium, investors looking to add star managers should note that this does not always mean they will stay on a premium.
The most high profile launch in recent years has been FE Alpha Manager Neil Woodford’s Woodford Patient Capital, which launched in April 2015.
The fund, which raised £800m at its listing, jumped out to a 15 per cent premium but has struggled since and is currently on a 5 per cent discount, according to the latest figures from the AIC.
Premium/discount of Woodford Patient Capital since launch
Source: Kepler Trust Intelligence
Cantor Fitzgerald’s Tepes says this is the classic example of a fund being oversubscribed at launch and therefore moving straight to a premium
“Even though they increased the size of the issue I think in the end they might have still been oversubscribed. As it is the UK’s biggest fund manager you felt pretty certain that you were going to get a huge amount of interest and that certainly got up to a premium of 15 per cent within a couple of months.”
However, this was unsustainable once the market had calmed down, according to Hawksmoor’s Conway.
“The premium that that trust went to was ridiculous it was effectively a large-cap equity fund so why would you buy a trust of liquid large-caps at a 20 per cent premium initially?” he said.
The other fund to have shown a similar pattern is the Fundsmith Emerging Equities Trust run by FE Alpha Manager Terry Smith, which also got out to a large premium early on.
Premium/discount of Fundsmith Emerging Equity Trust since launch
Source: Kepler Trust Intelligence
Kepler Trust Intelligence research analyst Alex Paget said: “In the case of Fundsmith and Woodford, I think it highlights the potential dangers of being caught up the in the crowd and reiterates the point that premiums never last forever.
“Both trusts’ managers have a strong retail following and are viewed as superstars in this industry, and therefore both were oversubscribed when their respective trusts came to market. However, both have delivered relatively poor NAV returns since inception and have therefore underperformed in share price terms as well.
“In the case of Woodford Patient Capital, the premium has been falling for most of the past 18 months as a result of this lacklustre return profile and a focus on small companies, though it is interesting to note that Fundsmith continues to trade at around NAV despite its underperformance and the fact that the board has been very active in issuing shares to rein the premium.”
Overall, the Woodford fund has lost 6.29 per cent on a total return basis while the Fundsmith fund is 1.44 per cent ahead since its launch in July 2014.
Another area where the hype got the better of investors is the peer-to-peer lending space, according to Hawksmoor’s Conway.
He said: “This is a very new sector which definitely has a role in society. I am not criticising the asset class – its existence is justified. There is a segment of society that can benefit from cheaper credit that these guys are going to supply.
“The problem is there are lots of different business models and each of these companies that have listed their portfolios in the form of investment trusts are choosing a slightly different route.
“How on earth do you judge which is the best business model? We don’t know – I don’t think anybody has the answer to that question.
“Secondly, we are not familiar with a lot of these management teams and so when it’s a new asset class from a company we don’t know very well you need to see a track record develop and build.”
He says companies including P2P Global Investments jumped out to an immediate premium, but have since slipped back.
Indeed, P2P Global Investments for example now sits on a 21.1 per cent discount and the sector as a whole is on a discount of 7.7 per cent, according to the latest figures from Cantor Fitzgerald.
Performance of fund since launch
Source: FE Analytics
As the above graph shows, since launch the trust has seen 24.64 per cent wiped from its share price, though over this time the loss on a total return basis is lower at 14.42 per cent.
“When these companies listed they all went to premiums because there was a lot of hype, everybody got very excited about the whole business model and we think that that jump was just not justified,” Conway said.
“They went to a premium we felt on hype rather than the quality of the issue and they’ve since gone to a pretty big discount and I think that they have bares out that you need to take a wait and see attitude with some of these asset classes, particularly when they are borne from nothing which P2P basically was.”
While the hope is that, over the long term, investors who bought at IPO shouldn’t be overly concerned about short-term discount movements, this shows the potential risks you can take if you back a young trust on a premium.