"There are more opportunities to trade out of trusts on narrow discounts than there are to buy trusts on wide discounts. In our view there is a lot of scope for profit-taking," said Iain Scouller, researcher at Oriel Securities.
He added that most trusts are trading at the upper end of their discount ranges when compared to the last couple of years. The tight discounts follow a period of outperformance for investment trusts, and increasing popularity of emerging markets and an eagerness to cash in on the commodity boom.
Stephen Peters, investment trust analyst at Charles Stanley says the investment trust sector will take a hit if there is a market correction.
"The investment trust sector does well in rising markets, as we've had for a while now. If we see a fall then it is going to suffer as a sector. I would be switching into open ended funds where possible – say selling Standard Life UK Small Caps and buying the similar open ended fund. You would also be looking to sell higher risk trusts and buy lower risk ones if you think we should see some market correction," he said.
Trusts with over £1bn assets under management (AUM)
| Diluted NAV |
Dividend Yield |
|||||||
| Investment trust |
Price |
Date |
Discount |
Estimate | Last published |
Gearing |
Net |
Gross |
| Alliance Trust |
350.60 (p) |
1 November 2010 |
-16.95 |
422.14 | 420.8 29 October 2010 |
110 | 2.4 | 2.4 |
| Scottish Mortgage Investment Trust |
662.50 (p) |
1 November 2010 | -11.23 |
746.3 | 745.74 29 October 2010 |
119 | 1.7 | 1.7 |
| BlackRock World Mining IT |
676.50 (p) |
1 November 2010 | -16.67 |
811.81 | 805.77 29 October 2010 |
103 | 0.7 | 0.7 |
| Caledonia Investments |
1769.00 (p) |
1 November 2010 | -17.68 | 2149.01 | 2113 |
100 | 2 | 2 |
| Foreign & Colonial Investment Trust |
292.80 (p) |
1 November 2010 | -10.94 |
328.75 | 328.66 | 110 | 2.3 | 2.3 |
| Templeton Emerging Markets IT |
649.50 (p) |
1 November 2010 | -4.64 |
681.08 | 672.72 | 100 | 0.6 | 0.6 |
| RIT Capital Partners |
1137.00 (p) |
1 November 2010 |
4.22 |
1091.01 | 1096.1 31 August 2010 |
108 | 0.4 | 0.4 |
Patrick Harrington is the manager of Jupiter Fund of Investment Trusts. He says he has taken a profit on some investment trusts this year, but that the narrowing of discounts has not led to a change in his investment strategy.
"I've trimmed a few Asian holdings and also made a bit of profit on Scottish Mortgage when it was trading at a tight discount. I bought into Pacific Assets and Monks Investment Trust as I saw better opportunities there," he said.
The manager picks out City Natural Resources High Yield Trust as a top performer in his holdings.
Trustnet data shows the more fashionable sectors such as Asia Pacific ex Japan and Global Emerging Markets as trading at a tighter discount. The specialist sectors like Specialist Property are trading widely, meanwhile, as are the habitual large-discounted sectors UK Smaller Companies and Japan.
For example, Pacific Assets Trusts, which changed its manager to First State in July, is currently trading on a five per cent discount, compared with a six month range of 11 per cent to four per cent.
Scouller said: "Discounts on a number of Asia funds are at, or close to, their narrowest discount levels for at least six months. Aberdeen Asian Smaller Companies is trading at net asset value (NAV), compared to a six month range of a 19 per cent discount to a three per cent premium."
He added: "We continue to think that some of the Chinese and Asian specialist funds are vulnerable to some profit-taking, especially if we get a pull-back in stock markets."
For investors keen to buy into investment trusts despite the tight discounts, Scouller points to Bankers, TR Property Ords and Baillie Gifford Shin Nippon, which he says are trading at the wider end of their six-month range.
"While discounts have narrowed in, investment trusts still offer a way into these markets at a price you don't get with open-ended vehicles," Harrington said.