The recent gold price volatility has put pressure on the discounts of investment trusts specialising in precious metals.
Experts believe the drop in price of gold bullion was primarily the result of selling in the futures market, given it was not accompanied by significant selling of physical gold—and concerns over Cyprus potentially selling from their vault didn’t help sentiment.
There are very few closed-end funds listed on the London Stock Exchange that invest purely in gold and precious metals producers. Golden Prospect Precious Metal (GPM) has seen its discount widen significantly over the last six months, so the bullion price fall exacerbated an existing trend. Altus Resource Capital (ARCL) has historically traded at a premium; this has narrowed by some 450 basis points compared with its six-month average (data as at 29 April). That said, the latter still trades above its three-year average. Avarae Global Coins (AVR) is trading at a discount that is tighter than its three-year average but, like GPM, it has widened this year by some margin.
At the other end of the spectrum, emerging market funds have seen the largest narrowing of their discounts among all UK investment trusts. Although emerging markets have not posted strong returns either this year so far, investor interest in the region has been high throughout 2012 and early 2013, prompting significant inflows into open-ended emerging market equity funds. Indeed, this is born out in investment trusts’ discounts. Investors in investment trusts from the Global Emerging Markets Allocation and Global Frontier Markets Equity categories have benefited the most from discount contractions over the last few months. Closed-end funds from both of these categories have seen their average discount narrow by some 4%.
Another beneficiary was the Bronze-rated Aberdeen New Thai (ANW)—the only closed-end fund in the Morningstar Thailand Equity category. This fund has seen its discount narrow from double-digits in January to single-digits in April and has even traded at a premium in recent days.
Being traded on an exchange, investment trusts are susceptible to market news and their discounts react accordingly. Eventually, though, evidence suggests that discounts tend to revert to their long-term average. An attractive discount should never be the sole reason to invest in a fund. Nonetheless, it can provide an opportunity to buy assets at pence on the pound and, for those who track their movement, discounts can help to time buy decisions.
