LONDON -- Many investors' portfolios will contain shares in some of the larger FTSE 100 companies, with BP, GlaxoSmithKline, and Royal Dutch Shell being three of the most common holdings.
An alternative to buying all three shares separately -- and thus paying three separate dealing commissions -- is to indirectly invest in all of them in one go by buying shares in an investment trust that holds all the companies in its portfolio.
In doing so, you should be able to obtain a diversified blue-chip portfolio for a lower price than if you bought each share separately. It's not just the commissions that you save; the vast majority of investment trust shares currently trade at prices well below the net asset value, or NAV, of their respective portfolios.
The trust that's at a premium
One investment trust that has a big stake in BP, GlaxoSmithKline, and Royal Dutch Shell is the 123 year-old Law Debenture
Law Debenture's current share price is 405 pence, having risen by 21% in 2012, and shares are trading at a premium of 14% to the trust's latest NAV of 354 pence. You may be wondering why they trade at a premium while other trusts with similar portfolios trade at a discount, but I can assure you there is a good reason for this discrepancy.
A nice little earner on top
Law Debenture differs from other investment trusts because it owns a fiduciary-services business. In 2011, earnings per share from this business were 7.25 pence, though the EPS for the most recent half-year, published two weeks ago, fell by 3% to 3.45 pence. These profits provide much of the income that underpins Law Debenture's 3.3% yield, yet there is nothing whatsoever in the published NAV to allow for it.
So if we value the fiduciary-services business using a fairly conservative P/E ratio of 10, we end up with 72.5 pence per share. Adding this figure to Law Debenture's quoted 354 pence-per-share NAV gives 426 pence, which now puts the shares at a "discount" of 5.2%. While that's not a big discount, some investors may value the global custody business using a much higher P/E, so their "discount" will be higher.
Let me round off by saying that things like investment trust discounts and P/E ratios can be puzzling if you're a newcomer to the stock market. So if you want to learn more about shares, a good place to start is our latest guide: "What Every New Investor Needs To Know." It's available for a limited time only, and you can download your copy from this link.
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Tony owns shares in GlaxoSmithKline and Law Debenture. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.