Discount to NAV

Closed-end funds and investment trusts trade on stock exchanges, so their share prices are set by supply and demand rather than directly by the value of their holdings. When investors are less enthusiastic about a fund, its shares may trade below the value of its investments.

For example, if a fund's net asset value is 10 per share and its shares trade at 9, the discount is 10%. Buying at a discount means paying 0.90 for each 1 of underlying assets.

Discounts can arise from weak demand for the fund's sector, concerns about the manager or performance, high fees, the use of borrowing or illiquid holdings that are hard to value. Discounts can widen in market downturns.

A discount can be an opportunity, since it may narrow if sentiment improves, boosting returns. But discounts can persist or widen. Fund boards sometimes try to narrow discounts through share buybacks or tender offers. When shares trade above net asset value, the fund is said to trade at a premium.