Shrewd followers of the stock market play the discount game when they review their portfolios. Peter Jackson reports

ONCE again the matter of value in the form of discount is topical in UK stock markets. The term value is normally considered to mean companies with a low price earnings ratio when compared to medium term earnings growth rates.

In the world of discounts, the key driver is net asset value (NAV) and a discount is merely the share price expressed as a percentage of the NAV. In an ordinary company NAV is often hard to ascertain. It is normally considered to mean shareholder funds less intangibles, but this is notoriously inaccurate as many fixed assets have either not been depreciated or appreciated in the books correctly or in an up-to-date manner.

Investors usually buy the shares of ordinary trading companies, not for their net asset value, but for their right to receive a future stream of earnings or dividends.

Investment trusts and property companies are to a much greater extent driven by NAV. This has been highlighted recently in the proposed takeover by Henderson Eurotrust of the much larger Charter European Trust, and by the proposed multi billion pound merger of half a dozen Scottish investment trusts, to form a mega investment trust based in Scotland.

This would be more than double the size of the UK's second largest investment trust, the Foreign and Colonial Investment Trust.

In the property world, there have recently been strong rumours regarding the proposal of a management buyout in Land Securities, Britain's largest property company, to cash in on the fact that the shares currently trade at a discount to NAV of 30 per cent.

The discount in British Land, the second largest property company run for many years by John Ritblat, is approaching 40 per cent.

The bottom line would be the selling of all the individual properties within the company and distributing the proceeds to shareholders.

That really would produce shareholder value. On the other hand merely closing the discount to 20 per cent would certainly help.

Switching from unit trusts to investment trusts is one way of playing the discount game.

There are many ways of making money in the markets and some trends and practices go in and out of fashion. In the late 1990s momentum investing was all the rage - never mind what you buy - just follow the crowd. Perhaps the discount investor will be a trend for this year.

Peter Jackson is investment manager at Tilly Bailey & Irvine

Published: 30/01/02