One of the more distinctive features of investment trusts — and a source of both opportunity and confusion for new investors — is that their share price can, and regularly does, trade at a different level from the actual value of the assets they hold. This gap, known as a discount or premium to net asset value, does not exist in the same way for open-ended funds, and understanding it is fundamental to using investment trusts sensibly.
What net asset value (NAV) means
A trust's net asset value is the total value of its underlying investments, minus any liabilities (including borrowings used for gearing), divided by the number of shares in issue. This represents, in principle, what each share would be worth if the trust sold all its assets, repaid its debts, and distributed the proceeds to shareholders.
Why the share price can differ from NAV
Because investment trusts are closed-ended, with a fixed number of shares traded on the stock exchange, their share price is determined by supply and demand among buyers and sellers, exactly like any other listed company — rather than being fixed to net asset value the way an open-ended fund's price is calculated directly from its underlying holdings. If more investors want to buy a trust's shares than sell them at a given moment, the price can rise above NAV (a premium); if more want to sell than buy, the price can fall below NAV (a discount).
Discount
A trust trading at a discount has a share price lower than its NAV per share — for example, a trust with a NAV of 200p trading at a share price of 180p is said to be trading at a 10% discount.
Premium
A trust trading at a premium has a share price higher than its NAV per share — for example, the same trust trading at 220p would be at a 10% premium.
What drives discounts and premiums
- Sentiment towards the trust's asset class or strategy — trusts investing in currently unpopular or out-of-favour sectors often see their discounts widen, while those in favoured areas may see discounts narrow or move to a premium.
- Sentiment towards the manager — changes in manager, periods of underperformance, or governance concerns can all affect investor demand for the shares independent of the underlying portfolio's value.
- Liquidity of the underlying assets — trusts holding harder-to-value or illiquid assets (private equity or property, for example) may trade at a wider discount, partly reflecting uncertainty about the accuracy of the stated NAV itself.
- Dividend yield and income appeal — trusts offering an attractive, well-covered income can sometimes command narrower discounts or premiums, reflecting demand from income-focused investors.
- General market conditions — discounts across the investment trust sector as a whole have tended to widen during periods of broad market stress or uncertainty, and narrow during more confident periods.
How investors use discount and premium information
Comparing a trust's current discount to its own history
Rather than looking at a discount in isolation, many investors compare a trust's current discount or premium to its own average over the past one, three, or five years, to assess whether it currently looks unusually wide or narrow relative to its own typical range.
Comparing across similar trusts
Comparing the discount of a trust against others investing in a similar sector or strategy can help identify whether a wide discount reflects trust-specific factors, or a broader trend affecting the whole sector.
A discount is not automatically "cheap"
A widening discount can reflect a genuine, justified market view — for example, concerns about the manager, the quality of underlying assets, or the accuracy of a NAV based on hard-to-value holdings — rather than simply representing an overlooked bargain. Discounts can also persist, or widen further, for extended periods rather than reliably narrowing back towards zero.
Comparing discount-related outcomes
| Scenario | Effect on shareholder return |
|---|---|
| Buy at a discount, discount narrows before selling | Additional gain beyond the change in underlying NAV |
| Buy at a discount, discount widens further before selling | Reduced return, or additional loss, beyond the change in underlying NAV |
| Buy at a premium, premium narrows or moves to a discount before selling | Reduced return, or additional loss, beyond the change in underlying NAV |
| Discount or premium unchanged between purchase and sale | Shareholder return closely tracks the change in underlying NAV |
Mechanisms boards use to manage discounts
Share buybacks
Some trust boards buy back their own shares in the market when trading at a wide discount, which can help support the share price and, if done consistently, may help narrow the discount over time, though it is not guaranteed to do so and reduces the trust's overall size.
Discount control mechanisms
Some trusts have formal policies committing the board to take action (such as buybacks or tender offers) if the discount widens beyond a stated threshold, providing investors with some assurance, though such policies vary in strength and are not a guarantee against a discount ever widening.
A worked example
Suppose a hypothetical investor buys shares in a trust with a NAV of 300p, at a share price of 270p — a 10% discount. Over the following year, suppose the trust's underlying NAV rises by 8% to 324p, purely from portfolio performance, while sentiment towards the trust also improves, narrowing the discount to 4%. The new share price would be approximately 311p (324p less a 4% discount), representing a rise of roughly 15% from the original 270p purchase price — meaningfully more than the 8% rise in underlying NAV alone, because the narrowing discount added an extra boost. Had the discount instead widened to 15% over the same period, the share price would be approximately 275p, a gain of only around 2% despite the same 8% rise in underlying NAV. This example is a simplified, hypothetical illustration of how discount movements can amplify or offset underlying performance, not a forecast of any specific trust's behaviour.
How often NAV is calculated and published
Most investment trusts publish an updated NAV daily, based on the closing prices of their underlying holdings, though trusts holding harder-to-value assets (private equity or property, for example) may publish updated valuations less frequently, such as quarterly, with the share price in the meantime trading based on investors' own estimates and expectations of how the true value has moved between formal valuation points. This publishing frequency is itself a useful piece of context when assessing how much confidence to place in a stated discount or premium at any given moment.
Tender offers and other discount-narrowing mechanisms
Beyond ongoing share buybacks, some trust boards use periodic tender offers, allowing shareholders to sell a portion of their holding back to the trust at a price closer to NAV than the prevailing market price, as a further tool for managing a persistent discount. Some trusts have also adopted continuation votes, requiring shareholders to periodically vote on whether the trust should continue in its current form, which can act as an additional pressure point encouraging boards to address a persistently wide discount or weak performance, since shareholders unhappy with either have a formal opportunity to vote for winding up or restructuring the trust.
Corporate actions affecting share count
Share buybacks reduce the number of shares in issue, which can, all else being equal, slightly increase NAV per remaining share (since the same total assets are now divided among fewer shares, assuming the buyback was executed at a discount), providing a modest additional benefit to remaining shareholders beyond any effect on the discount itself.
Comparing discount behaviour across different trust sectors
Discount levels and volatility vary considerably by sector. Trusts investing in liquid, easily valued listed equities (UK or global equity income trusts, for example) have historically tended to trade with narrower, more stable discounts than trusts investing in less liquid or harder-to-value assets such as private equity, property, or specialist infrastructure, where valuation uncertainty naturally contributes to wider and more variable discounts. Comparing a trust's discount only against others in the same or a similar sector, rather than against the investment trust sector as a whole, gives a more meaningful sense of whether its current discount looks unusual.
Where to find discount data
The AIC publishes discount and premium data across the whole investment trust sector, broken down by sector, updated regularly, and most platforms and financial data providers also display a trust's current discount or premium alongside its share price and NAV. Reviewing this data periodically, rather than only at the point of an initial purchase decision, can help investors understand how a holding's discount has evolved over time relative to both its own history and its peer sector.
A closing perspective on discounts as part of total return
Ultimately, an investment trust shareholder's total return over any period reflects the combination of the underlying portfolio's performance and the change in the discount or premium, and both deserve attention when reviewing a holding's results. Treating the discount purely as background noise, or conversely treating it as the sole basis for a buy or sell decision, both miss the fuller picture that combining underlying performance with discount dynamics provides.
Key takeaways
- An investment trust's share price can trade above (premium) or below (discount) its net asset value, unlike open-ended funds, whose price is set directly by their NAV.
- Discounts and premiums are driven by sentiment, liquidity of underlying assets, manager reputation, income appeal, and broader market conditions.
- Comparing a trust's current discount to its own history and to similar trusts provides more context than looking at the discount in isolation.
- A wide discount is not automatically a bargain — it can reflect a justified market view and may persist or widen further.
- Movements in the discount or premium can meaningfully add to or subtract from an investor's return, independent of the change in underlying NAV.