Bonds, equities and (in some cases) investment trusts have been rallying hard for the last few years as uncertainty continues to affect markets, but investors should be careful when buying at the top of the market. 
In more recent years, investment trusts have become more widely-held by investors and as a result more attention has been focused on the premium/discount issue.
The relationship between market capitalisation of the trust and the value of its underlying assets (net asset value or NAV) can sometimes be negative and shares trade at a discount, or positive and trade at a premium.
Tony Yousefian investment company research specialist at FundCalibre, said: “Generally speaking the boards of investment trusts nowadays are a lot more cognisant about the premium/discount as far as the share price is concerned so it’s a bit more difficult to find an investment trust going to a massive premium or discount.
“You’ll find when an investment trust goes to a big premium/discount the board to act rather quickly to bring the share price back to parity with the NAV whereas in the past they weren’t as mindful of the premium/discount position.
“Having said that there are still pockets where one can find the occasional big movement in the premium/discount.”
After previously considering some of trusts trading on large discounts that have the potential to rise, FE Trustnet looks at the funds on large premiums that are concerning market analysts.
Tony Yarrow, fund manager at Wise Investments, says discount rates currently being applied to trusts are “very conservative”.
He said: “The discount rate should be lower, if they were the net assets values would be higher and if the net asset values were higher, then the premium disappears.
“But the premium seems quite high to me and in the case of HICL, which, while it has been over 20 per cent [previously] and is currently in the mid-teens, still seems offputtingly high to us.”
Infrastructure has been a highly written about sector over the last few months as US president Donald Trump has been vocal in his support for fiscal policy and governments across the world moving more towards fiscal policies than monetary policy.
HICL, previously known as the HSBC infrastructure fund, has been one of the top performers in the IT Infrastructure sector – though there are only eight members – over three and five years.
Performance of trust vs sector over 5yrs
Source: FE Analytics
The £2.4bn fund has returned 83.42 per cent over the past five years, 26.02 percentage points higher than the sector average.
Yarrow said: “It has been as high as the low-to-mid twenties and it came back a bit last summer when the bond market sold off because this one is seen as a bond proxy but it still looks a bit on the high side to us.
“To be absolutely honest we would like it to trade at par and if there was to be a premium in low single figures then I think we would find that quite interesting but certainly 15 [per cent] premium is too high for us.”
The fund is on a 13.9 per cent premium, has a 4.5 per cent yield and an ongoing charges figure (OCF) of 1.22 per cent.
FundCalibre’s Yousefian says you can still find trusts that for one reason or another go to big premiums or discounts and one such fund is Baillie Gifford Japan.
“One of the investment trusts that has gone to a premium albeit to the average investor it may seem like a small premium is the Baillie Gifford Japan trust,” he said.
The £500m trust, which is 16 per cent geared and has an OCF of 0.88 per cent, is on a premium of 5.1 per cent.
Yousefian added: “It is currently sitting on somewhere around about 5 per cent premium which doesn’t sound much but having said that, if you look at the history of it, the board have always been very keen to try and limit the premium by being pragmatic about the approach that they take.
“Japan is an area where a lot of investors are now turning to and is also one of our more favoured areas, but whilst I do like the region and we do have a reasonable allocation to Japan but there is no way we would pay a 5 per cent premium for the asset class.
“I would buy the open-ended version and then watch the investment trust, wait for it to come back to parity or a small discount and then pick the investment trust up.”
The trust has consistently outperformed and over the last five years has returned 211.46 per cent the top in the sector – of four qualifying funds – and 123.17 percentage points ahead of the Topix index.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
The trust aims to provide long-term capital growth through investment in mid-to-small-sized Japanese companies which are believed to have above average prospects for growth.
“Big premiums are quite rare at the moment, although the stand out example is British & American which is currently trading at a premium of 58.6 per cent,” Martin Bamford, managing director of Informed Choice said.
“This trust in the AIC UK Equity Income sector invests predominantly in investment trusts and other leading UK quoted companies to achieve a balance of income and growth.”
Despite the high premium, the trust is offering a very high dividend yield of 10.3 per cent with an OCF of 3.28 per cent, according to the latest figures from the AIC.
The £20m trust has been an inconsistent performer and has lagged the FTSE All Share over one, three, five and 10 years.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
“With a fifth of the portfolio invested in a single stock – Geron Corporation, who develop therapeutic cancer treatments – this is a high risk investment,” added Bamford.
“When I see premiums and yields at these elevated levels, it gives me cause for concern as an investor and a higher level of due diligence should be applied to understand the reasons before investing.”