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Post by Fletchsmile on Nov 9, 2016 11:31:44 GMT 7
Worth a look for those looking for income yields - which includes Fletch 
Seems the pendulum may be shifting back a little from "overpriced premiums to NAV" to "more attractive discounts"
The current dicount or premium vs. average historic discount premium is something I tend to look at as I dislike paying premiums
==================================== Investment trust bargains: UK Equity Income
People love a bargain. This should apply to investments as to any other walk of life. Over the past year many UK Equity Income investment trusts have moved to ever-wider discounts to the underlying value of the assets they hold or Net Asset Value (NAV).
Investment trust discounts widen when sentiment is negative and more people want to sell the trust’s shares than buy them. In some cases discounts are around 10% or more. This means it is possible to buy £1 of assets for approximately 90p. It wasn’t that long ago investors were prepared to pay a premium (i.e. £1.05 for £1 of assets) for the attractive yields offered by these trusts.
When investors seek an investment trust bargain it is important to look at more than just the current discount. It is helpful to know the average discount over the past year, for example. This helps determine whether the current discount is attractive. A trust that trades at a wider level than average could be said to be good value.
contd....
www.hl.co.uk/news/articles/investment-trust-bargains-uk-equity-income
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AyG
Crazy Mango Extraordinaire
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Post by AyG on Nov 9, 2016 13:07:21 GMT 7
I really hate these HL articles based upon Z-score over 1 year. That's a ridiculously short period to consider. Of course, from the writer's point of view, this is a really simply way to churn out endless articles, even if they do stink of bovine ordure.
The price of higher income shares has been forced up artificially because of a hunt for yield following the dramatic fall of yields in bond markets as a consequence of ill-considered "innovative" fiscal policy. When (as is bound to happen) things start to normalise, money will move from these shares to bonds and the price of the higher income shares will fall. (Short term income, but longer term guaranteed capital loss.) The fact that the analysis is based upon a mere year means it only reflects the highly distorted times we are in. It is utterly, utterly meaningless and irresponsible.
Putting it differently, the article talks about "bargains", but in fact they are simply traps waiting to be sprung.
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Post by Fletchsmile on Nov 10, 2016 10:06:05 GMT 7
I agree 1 year time horizon is too short. I prefer longer for almost all metrics when evaluating invetments. However, no-one looks at it in isolation. Like any other metric. I like these articles just from the point of view of the thoughts they provoke. Sure they are not complete analysis. You can't do that in a short article. What's important to me is not necessarily having someone hand me full analysis but someone throwing up ideas or thoughts or noting changes or possible pivot points etc. What's interesting is that we might now be seeing/ have been seeing a turning point as flagged in that metric. i.e income many funds previously trading at a premium or close to NAV as people chased yield via equity funds. That's now starting to reverse. We've said before on here ITs focuses on equity income shares being chased up and ITs going from discounts to premiums (= double gain) For your point:
This is important in the context of equity income ITs. If you believe higher income shares will fall there is now a stronger chance of that double whammy of not only the underlying falling, but as often happens with investment trusts the discount to NAVs widens so you get hit twice. i.e. a change in what's been happening. So what will you do?
The other interesting thought you bring out if you think the money will move into bonds. What happens next? I'm not convinced by that at all this time round. Historically maybe people rotate out of equities into bonds and vice versa. The problem with that theory put forward this time round is that interest rates are at an all time low. People are talking of the end of a 30 year bull-run, potential bond crash being possible etc. I don't see people moving out of equities at this point in the cycle. Who wants to lock into bonds at this point in time?
I think there's a trap in moving from equities to bonds as you suggested. On normal fixed rate bonds you are looking at capital losses that are also guaranteed. So I'm not keen on that either
For me I think switching to bonds as you suggest is an even bigger risk at this stage. The discount widening on equities ITs is something to think about. Start thinking about bargains coming up. I might wait for the discounts to widen further though as I think there may be further bargains ahead if you wait longer. I don't see myself shifting significant sums into bonds though at this point.
The z-score metric in isolation means little, as does the article. It's how we use it. I think it over simplifies. I also don't really agree with your idea people will switch into bonds for quite some time, although I respect your thinking.
Put them all together though and and they throw up some interesting thoughts ideas
I'm curious though, are you thinking of adding to bonds at the expense of equities and ITs? How's that fit with your idea of taking profits on index-linked bonds (or not)? If I was to switch to bonds from equities index-linked would perhaps be a consideration rather than the fixed rate variety.
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