**

Are half-price investment trusts too good to be true? The allure of snapping up a seemingly undervalued asset is strong, particularly in today's volatile market. But before you rush to buy discounted investment trusts, also known as closed-ended funds, it's crucial to understand the potential risks and rewards. This in-depth guide explores the intricacies of investing in discounted investment trusts, helping you determine if a seemingly bargain-basement price truly represents a savvy investment or a potential pitfall.

Understanding Investment Trust Discounts and Premiums

Investment trusts are companies that invest in a portfolio of assets, typically shares and bonds. Unlike open-ended funds (OEICs or unit trusts), investment trusts issue a fixed number of shares. This means their share price can trade at a discount or a premium to their Net Asset Value (NAV). The NAV represents the total value of the underlying assets held by the trust, divided by the number of shares outstanding.

A discount arises when the market price of the investment trust shares is lower than their NAV. This implies that the market is undervaluing the trust's assets. A premium, conversely, means the market price is higher than the NAV, indicating investor optimism and potentially overvaluation.

Many factors influence these discounts and premiums, including:

• Market Sentiment: General market conditions, investor confidence, and news about the underlying assets significantly affect investment trust share prices.
• Liquidity: Investment trusts with less liquid underlying assets might trade at a larger discount.
• Trust Management: The performance and reputation of the fund manager can heavily influence investor perception and share prices.
• Gearing (Leverage): Highly geared trusts (those using borrowed money to invest) can amplify both returns and losses, impacting their market valuation.
• Discount Width: This refers to the percentage difference between the market price and the NAV. A wider discount (e.g., 20%) might seem tempting, but warrants closer investigation.

Why are Investment Trusts Trading at a Discount?

A discount doesn't automatically signal a bargain. Several reasons can lead to an investment trust trading below its NAV:

• Market Volatility: During market downturns, investors might sell even fundamentally sound assets, creating temporary discounts.
• Poor Performance: Consistent underperformance relative to benchmarks can lead to decreased investor confidence and price pressure.
• Illiquidity: A lack of buyers can depress prices, especially for smaller or more specialized trusts.
• Structural Issues: The trust's structure, such as high ongoing charges or complex management arrangements, might contribute to a persistent discount.

Is a Discount a Sign of Undervaluation?

While a discount can indicate undervaluation, it's not a guarantee. A persistent discount might signal underlying issues that the market has identified. It's crucial to thoroughly investigate why a trust is trading at a discount before jumping to conclusions.

Due Diligence Before Investing in Discounted Investment Trusts

Before investing in any discounted investment trust, perform thorough due diligence:

• Analyze the NAV: Examine the trust's portfolio holdings and the quality of its underlying assets. Is the discount justified by the underlying assets or are there other factors at play?
• Evaluate the Management Team: A skilled and experienced management team is crucial. Research their track record, investment philosophy, and any potential conflicts of interest.
• Review the Ongoing Charges: High ongoing charges can erode returns, making even a deeply discounted trust less attractive.
• Understand the Trust's Structure: Familiarize yourself with the trust's investment objectives, strategy, and any specific risks associated with its investments.
• Assess the Liquidity: Check the trading volume of the trust's shares. Low liquidity can make it difficult to buy or sell shares at your desired price.
• Consider the Discount Width History: Look at the historical discount level. Has it been consistently wide, or is it a recent phenomenon?

Potential Pitfalls to Avoid

• Value Trap: A discount doesn't guarantee future price appreciation. The underlying assets might be fundamentally weak, leading to further price declines.
• Ignoring the Underlying Issues: A large discount might mask underlying problems within the trust, such as poor management or a flawed investment strategy.
• Liquidity Risk: It can be difficult to exit a position quickly if the trust has low trading volume.

Investment Trust Discount vs. Share Price Volatility

It's essential to distinguish between a discount and general share price volatility. A discount is relative to the NAV, while volatility refers to fluctuations in the market price irrespective of the NAV. While a discount might offer a potential opportunity, volatility introduces additional risks.

Conclusion: Proceed with Caution

Investing in discounted investment trusts can be profitable, but it demands careful consideration and thorough research. A deep discount isn't necessarily a sign of a bargain; it often signals underlying issues requiring careful scrutiny. Always perform due diligence and understand the risks before investing, consulting a financial advisor if needed. Remember, a perceived bargain can quickly turn into a costly mistake if you aren't fully informed. Focus on the quality of the underlying assets and the competence of the management team, not just the discount percentage itself.