Closed-End Fund and Investment Trust Discounts

Abstract

U.S. closed-end funds and U.K. investment trusts typically trade at a discount to net asset value. Two popular explanations are tax liabilities and noise trading. But U.K. investment trusts are exempt from capital gains tax, so tax liabilities do not explain discounts in the U.K. Noise trader theory can explain discounts if we assume, first, that individual investors, but not institutional investors, are noise traders, and, second, that institutions do not buy investment trusts. There is no evidence that the first point is true, and, in the U.K., the second point is false. Further, contrary to American analysis, making a takeover bid for a U.K. investment trust makes economic sense for some investors, and bids, utilizations, and other means of obtaining NAV have been pursued in the U.K. But discounts prevail. A prudent conclusion is that the causes have still not been satisfactorily explained.