“If we look at the infrastructure sector, trusts on aggregate trade at a premium because supply is limited and they cannot keep issuing,” he explained. “However, that argument is valid until you realise that they actually appear to be doing quite well on the issuing side, while the reverse applies to discounts.
“If a trust goes to a 3% discount but has outperformed in NAV terms over the period then maybe it will come out with a decent result overall. We need to keep context with these things.
“Where there may be a problem is in property and private equity – if they go out of fashion then we may see large discount moves. On the other hand, the alternative of being in an open-ended fund where they suspend it and lock you in for two years is not too appealing either.”
With both US and UK rate rises are on the horizon, Peters is intrigued by the possible impact that they could have on prices.
“Investment trust discounts cannot stay where they are forever,” he expanded. “When interest rates rise it will cause discounts to widen and some premiums will turn into discounts.
“It might be the case that some trusts may always have to trade at a discount because of the underlying liquidity of the asset class. It may not happen soon, but it is a challenge that the sector will face at some point and it will be interesting to see what impact interest rates have.”
Although Sketch concedes that interest rates will certainly have some sort of impact, he is not convinced that hikes will be sharp enough to alter the attractiveness of a potential investment.
“If you have a debt-based investment trust – of which there are many – you would expect them to be comparatively less attractive if interest rates go up a long way,” he said.
“However, while interest rates will go up, it will take them a very long time to go a long way. For an investment trust yielding 4-6%, rates going up 0.25% does not change the investment case at all.”
So it seems there is no denying that certain asset classes are susceptible to illiquidity and interest rates, in the closed-ended market as with its open-ended counterpart.
However, is it yet to be seen whether the former is more vulnerable, and how much of a hit it is set to take.
