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Contrary view on discounts

Unicorn Asset Management says the discount volatility that may deter some investors and advisers from investing in investment trusts is creating good opportunities for its Mastertrust fund of investment trusts.

Mastertrust fund manager Peter Walls says people have divided opinions about investment trusts. He says there are some good managers in the sector but some investors are concerned about discount volatility and the use of gearing by some trusts and, for them, a fund such as Mastertrust could provide investment trust exposure while a specialist picks and manages a portfolio of individual trusts.

Walls says when asset classes go up, a trust’s discount to net asset value tends to narrow and when assets go down, discounts widen. He says people like to buy assets that have gone up on the basis that they will continue to rise and are happy to sell once the assets start to slide. This herd mentality is exaggerated in an investment trust due to the volatility of discounts and potential gearing but can enable Unicorn to buy or sell a holding at a good price.

Big discounts can signal a cyclical downturn, with lots of investors selling, but for Walls’ contrarian approach, this may be the best time to invest. The contrarian approach involves going against the consensus view, so the potential for a narrowing of a wide discount can translate into solid returns for Unicorn.
Similarly, Walls may decide to reduce or cut holdings in trusts where discounts have narrowed or are trading at a premium to their net asset value.

Walls says: “I am forced to be a contrarian because I am concerned with trying to select trusts that have the protection of a big discount with the potential to narrow. Narrowing of a discount may encourage us to take a profit and recycle the cash into another deeply discounted trust but we take a long-term approach are not into high-portfolio turnover.”

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