Investment trusts can invest in thinly traded or unlisted securities which don’t have an observable market price. For these assets in the fund, managers will have to use a hierarchical pricing model, assessing fair value first by observing comparable transactions in the market and then by using a fair value model. Because of these subjectivities the price of the investment trust itself will be uncertain as investors in the fund effectively disagree with the reported NAV valuation. In any case, investment trusts are usually daily traded while underlying valuations are much less frequent than that. So, the price of the fund may change on a daily basis but the NAV will often not change for many days weeks or months. During periods where the NAV hasn’t been updated, the true value of the underlying assets could deviate significantly from the NAV and the price of the investment trust.
To support investors in understanding their fund, managers should always use a transparent and independent valuation process. The process should not be a ‘black box’; investors should be able to understand how valuations were reached. Of course, they should also follow the established pricing hierarchy where possible and be as objective as they can in the valuation process. The managers may choose to value the underlying assets more frequently so that the NAV moves more frequently in line with the price. However, this may not necessarily be desirable; more frequent does not necessarily mean more accurate. They could also switch to less-than-daily trading of the fund, but again this just reduces investor liquidity without necessarily gaining more accuracy in the valuation of the assets.
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