ITC priced at discount to NAV?

[Logarithm n Blues]

Hi all,

Some of the course materials suggest that Investment trust companies may be priced at a discount to their net asset value.

ie. (as I understand it) price of 100% of shares < Market value of assets - liabilities

In cases where this is true couldn't it become possible for a very wealthy individual to buy up all the shares and wind up the company to make a quick profit?
I understand that this won't be practical if the difference is small:
-There will be lots of dealing expenses.
-Prices of the ITC shares and of the underlying assets may move. Especially if the market spots what's going on.
-The investor doesn't have the power to wind up the company. They would rely on the board co-operating with their wishes.
-Costs of admin and likely legal fees in making all this stuff happen.

But would you suggest that this means that any discount to NAV will be small?

 

[Lindsay Smitherman]

Hi

Yes in theory if everyone holding the shares were in the position to be able to do this (ie buy up all the shares and then force a wind-up - if this were possible), then this would push the price closer to NAV. However, everyone isn't going to be in that position.

The discounts in reality can and have been quite large. The course notes mention discounts of 20%-30%, but they have in extreme cases even been in the region of 40%-50%.

The price of a share represents what people are prepared to trade it at. Where ITCs are trading at a discount, effectively there are more willing sellers than willing buyers in the market: supply forces are stronger than demand.

If there were such a wealthy individual prepared to do as you suggest, then people holding the shares would be happy to offload them for a price that sits lower than the NAV which those individuals will most likely never be able to get their hands on. So that's the market price.

Although beyond the Core Reading, you might be interested to know that some investment trusts have a fixed life or continuation vote arrangement, whereby at certain points in time the shareholders can vote as to whether they wish to wind up the company at that point (and receive their share of residual net assets) or continue. The existence of such an arrangement would tend to keep the share price closer to NAV per share.

 

[Logarithm n Blues]

Thanks Lindsay, that is really helpful

Although beyond the Core Reading, you might be interested to know that some investment trusts have a fixed life or continuation vote arrangement, whereby at certain points in time the shareholders can vote as to whether they wish to wind up the company at that point (and receive their share of residual net assets) or continue. The existence of such an arrangement would tend to keep the share price closer to NAV per share.

I am interested to know! Thanks!
It's background and context like this that makes the material memorable to me.