Q: How does the pricing structure work?
According to Annabel Brodie-Smith, communications director of the Association of Investment Companies, discounts can be seen as both a strength and a weakness of the sector.
Ms Brodie-Smith said much of the fascination when it comes to investment company discounts, ironically, is simply because they are so readily available on investment companies.
Like any other quoted company investment companies are valued by their share price, but they can also be assessed according to whether they are trading at a discount or a premium to the net asset value (NAV) per share.
The NAV per share is simply the value of the underlying assets (less debt), divided by the number of shares in issue at any one time.
If the share price is less than the net asset value per share, as is most commonly the case, the investment company is said to be trading at a discount.
To illustrate, a NAV per share of 100p and a share price of 90p would equate to a 10 per cent discount, whereas a NAV per share of 100p and a share price of 110p would mean a premium of 10 per cent - in other words, the market is prepared to pay more for these shares than the value of the underlying assets.
Ms Brodie-Smith said: “Buying at a discount means investors are getting more assets working for them to produce both capital and income, and this can be very useful, especially in these low interest rate, inflationary times.
“Further still, if the discount subsequently narrows, then gains can be enhanced, and there are a number of discount opportunists who like to go ‘bargain hunting’ in the sector.
“But this should never be a given – indeed discounts can widen as well as narrow, thus diluting gains. So whilst the discount/ premium issue is something to be mindful of,they are one of many factors to bear in mind when considering an investment.”