Continued political focus on the investment trust sector is going to keep discounts wide and open up...
Continued political focus on the investment trust sector is going to keep discounts wide and open up opportunities for arbitrageurs but also for retail investors says investment trust specialist Nick Greenwood.
Recent stock market turnarounds have already started pushing up net asset values of most trusts, but share prices are often lagging behind because investors are being panicked into selling while buyers remain wary because of the bad news stories currently being generated.
This means investors can buy into company assets at discounts that still remain up to 30% or more.
In general terms most equities are still being discounted because of fears of economic stagnation over the coming year.
But with the difference in yields between fixed interest instruments such as gilts and most equities at levels not seen since even before the mid-1970s crash, investors really need to ask themselves if they believe the view that the economy is in as much trouble as back then, Greenwood says.
"In 1974 we were bailed out by the IMF. The economy was in much worse shape then. The key indicator of company profitability is in directors' dealings. Lots of directors have been buying shares in their own companies in recent weeks. If we were going to see a collapse of profits then directors wouldn't be buying their own shares."
Greenwood adds that for investment trust share prices to rise the market needs a wave of buyers to come in: this has started with directors and is likely to be followed by venture capital firms.
Yesterday saw the Amerindo Internet Fund announce that Millennium Partners had taken a 15% stake in the £37m company that was once worth £400m, and which trades at a 40% discount.
And before that Gartmore's Irish Growth Fund announced it was buying out the former holdings of Laxey Partners as part of a strategy to reduce the number of outstanding shares by up to 15%.
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