The Lindsell Train Investment Trust is at risk of seeing its already significant premium reach “extreme levels” after the company was promoted into the FTSE All-Share.
The FTSE All-Share index’s annual review saw Nick Train’s trust promoted to the multi-cap index, which is made up of the FTSE 100, 250 and Small Cap indices.
The Lindsell Train IT currently trades at a 34 per cent premium but will now form part of the FTSE Small Cap index, meaning forced buying by index funds could push shares up still further.
Ewan Lovett-Turner, analyst at Numis, said the obligation for tracker funds to buy new stocks entering the index will likely mean Mr Train’s repeated warnings – stating that the company is already trading on an excessive premium – will be in vain.
“[The premium] has the potential to reach extreme levels, in our view,” he added.
Mr Train’s trust has not traded on a discount since July 2012 and its premium is now at a five-year high, according to FE Analytics. Any extra buying from index funds could see it reach unprecedented levels.
The manager has previously taken the unusual step of warning investors not to buy the trust’s shares. As early as 2012 the manager said the fund was too expensive, at a time when it was trading at a 21 per cent premium to NAV.
Mr Train told investors to “think carefully” at that point, reminding them trust reached similar levels in 2001, before the share price fell to a 15 per cent discount, causing some investors to lose a “whopping 28 per cent of quotational value – while the net asset value (NAV) had fallen by just 10 per cent.”
The trust’s share price took more than three years to recover from that drop.
“As a result, we would advise investors to think carefully before buying shares at such a steep premium to NAV,” said Mr Train. Other investment trusts promoted to the FTSE All-Share in the latest reshuffle include the Henderson International Income trust, Schroder European Real Estate and the Target Healthcare Reit.
The Aberdeen Emerging Markets trust failed a liquidity test and was removed from the FTSE index group.