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Investment trusts: bubbles and bargains

Looking at the price and beyond
December 6, 2019

If investing is fraught with complexity, understanding the small print can also be a route to better results. Such is the case with investment trusts: from the use of gearing to an ability to boost dividends by dipping into capital reserves, characteristics that make trusts more complicated than open-ended funds can also translate into better returns when used wisely.

The same logic applies to the share price dynamic. Investors can enter or exit investment trusts by trading their shares on the secondary market, as opposed to the transfer of open-ended fund units between an investor and fund provider. This means that investment trusts can prove more vulnerable to shifts in sentiment on the underlying market, with share prices moving accordingly. Those who monitor these price trends closely can potentially stay ahead of the curve – either by buying into a good trust at a cheap price in times of undue gloom, or selling down a name that has started to look overvalued.

As with any investment call, the market price should not be the leading factor in your decision. Instead, you should always focus on the fundamentals first, including the investment manager’s philosophy, approach and track record, the outlook for the underlying asset class and how the trust might fit in with your broader portfolio. But an analysis of investment trusts’ current share prices versus their average levels can highlight names you may wish to buy or sell.

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