Hurrah for Nick Train. He warns investors not to buy his investment trust - at a 20% plus premium to net assets, it's just too expensive.
That might sound as if he's doing a Ratner. But it's more like a pop star saying 'Don't pay twice the price by buying my tickets from a tout.' The price of investment trusts is set by the stock market, not the fund manager.
Current market conditions have led private investors to dash for cover, and they're buying two things; one is income, and the other is gurus. Income - because equities at 3.5% upwards are just about the only way of beating the derisory bank rate (apart from property, which has its lovers, but is an inherently illiquid investment, and junk bonds, which may be caught in a gilt-derived bubble). And gurus - 'safe' hands, alpha-grabbers, because a 'name' fund manager with a good story is perceived as offering shelter against the chill winds blowing through the market.
That has left a lot of investment trusts trading at a premium. In other words, if you buy into the trust, you're paying more than the shares, bonds, and other assets that it holds are worth. Now, typically, investment trusts have traded at a discount. That's because there would be liquidation costs to be taken into account if you did actually flog off all the assets, among other things. You could argue for them trading at par - that's pretty much how unit trusts and OEICs are sold (through a different mechanism, not the stock market). But I don't see why you would pay one-fifth more than the assets are worth.
Look at it this way. I can sell you a share in Vodafone for 177p, or I can sell it you for 212p. Your choice.
Past history also shows that although investors are trying to head for 'safety' by buying Nick Train's fund, in fact they're taking a huge risk just because of the valuation. The trust has crashed and burned before. Even if the asset value remains stable, rerating the fund to par would give a 16% loss.
The article on Thisismoney.com is worth reading. It points out that other trusts, such as Edinburgh Investment, are also riding high. Almost any trust that includes 'income' in the name is at a premium, including several emerging market trusts that don't actually beat the index in terms of yield. But the article doesn't mention the trusts which I think are the most overrated - the infrastructure trusts. These trusts invest in public/private sector infrastructure projects, which deliver a contracted (and often RPI linked) stream of income over the long term. So far, so good. But as always, what matters is the valuation.
John Laing Infrastructure trades at a 5% premium; Bilfinger Berger, HICL, and 3i, all at nearly 10%. That seems a bit rich for me. Besides, I have a suspicion that the NAV is worked out by using an NPV model based on future income streams. That means, if the interest rate goes up, the discount rate in the model goes up, and consequently the NPV (equals NAV) goes down. With base rates practically nil, that gives the NAV nowhere to go.I also suspect these shares have nowhere to go in terms of growth - compared to, say, buying a tech stock with a 3% yield, and there are a few of those around.
Heading for safety? Be quite sure that you've analysed what 'safety' is first - because a lot of the things financial advisers are selling as 'safe' are anything but.
That might sound as if he's doing a Ratner. But it's more like a pop star saying 'Don't pay twice the price by buying my tickets from a tout.' The price of investment trusts is set by the stock market, not the fund manager.
Current market conditions have led private investors to dash for cover, and they're buying two things; one is income, and the other is gurus. Income - because equities at 3.5% upwards are just about the only way of beating the derisory bank rate (apart from property, which has its lovers, but is an inherently illiquid investment, and junk bonds, which may be caught in a gilt-derived bubble). And gurus - 'safe' hands, alpha-grabbers, because a 'name' fund manager with a good story is perceived as offering shelter against the chill winds blowing through the market.
That has left a lot of investment trusts trading at a premium. In other words, if you buy into the trust, you're paying more than the shares, bonds, and other assets that it holds are worth. Now, typically, investment trusts have traded at a discount. That's because there would be liquidation costs to be taken into account if you did actually flog off all the assets, among other things. You could argue for them trading at par - that's pretty much how unit trusts and OEICs are sold (through a different mechanism, not the stock market). But I don't see why you would pay one-fifth more than the assets are worth.
Look at it this way. I can sell you a share in Vodafone for 177p, or I can sell it you for 212p. Your choice.
Past history also shows that although investors are trying to head for 'safety' by buying Nick Train's fund, in fact they're taking a huge risk just because of the valuation. The trust has crashed and burned before. Even if the asset value remains stable, rerating the fund to par would give a 16% loss.
The article on Thisismoney.com is worth reading. It points out that other trusts, such as Edinburgh Investment, are also riding high. Almost any trust that includes 'income' in the name is at a premium, including several emerging market trusts that don't actually beat the index in terms of yield. But the article doesn't mention the trusts which I think are the most overrated - the infrastructure trusts. These trusts invest in public/private sector infrastructure projects, which deliver a contracted (and often RPI linked) stream of income over the long term. So far, so good. But as always, what matters is the valuation.
John Laing Infrastructure trades at a 5% premium; Bilfinger Berger, HICL, and 3i, all at nearly 10%. That seems a bit rich for me. Besides, I have a suspicion that the NAV is worked out by using an NPV model based on future income streams. That means, if the interest rate goes up, the discount rate in the model goes up, and consequently the NPV (equals NAV) goes down. With base rates practically nil, that gives the NAV nowhere to go.I also suspect these shares have nowhere to go in terms of growth - compared to, say, buying a tech stock with a 3% yield, and there are a few of those around.
Heading for safety? Be quite sure that you've analysed what 'safety' is first - because a lot of the things financial advisers are selling as 'safe' are anything but.
No comments:
Post a Comment