Some of the biggest names in investment trust research have slammed the industry for not doing enough to educate investors about the risks of buying trusts trading at share-price premiums.
The trust’s boards have been told to revise their “shockingly bad” factsheets and engage with clients to prevent the industry being hit by a new crisis of swingeing investor losses, as we reach 12 years since the split-cap scandal engulfed the industry.
As listed companies owned via stockmarkets, investment trusts’ share prices are determined solely by demand for their shares. At times of market buoyancy the shares’ value can reach a premium to the value of a trust’s underlying investment portfolios.
This premium exposes investors to the risk of suffering sharp losses if sentiment turns, irrespective of the performance of the trust’s actual investments –and many trusts are in this situation today.
Jackie Beard, director of closed-end fund research at Morningstar UK, said the situation was “going to unwind at some point”.
She warned that when interest rates go up, investment trust prices are likely to come down and “there will be lots of disappointed investors”.
The analyst also said it was important to protect the reputation of the sector as the split-cap crisis – where many investors were left out of pocket when debt-laden trust structures hit the rocks – was still fresh in investors’ minds.
Ms Beard said investment trust boards and managers were not doing enough in terms of communication, both on the potential risks of investing in them but also through their interaction with investors.
“Trust factsheets, compared with open-ended funds, are shockingly bad,” she said. “Some just have a disclaimer and the top 10 holdings. We are trying to get boards to up their game and make their voices heard.”
David Coombs, head of multi-asset investments at Rathbone Unit Trust Management, said the major buyers of investment trusts, such as wealth managers, should be aware of the risk of premiums turning into widening discounts.
But with other types of investor, such as direct clients buying trusts through platforms, it is “incumbent on the investment trusts to clearly warn that discounts can go up or down”.
In 2012 Nick Train, manager of the Lindsell Train investment trust, warned investors not to buy his trust because the premium was too high, but that has been an exception.
Mr Coombs said that communication from investment trusts in general was “not great” and that the industry was particularly poor at “highlighting risks”.
Stephen Peters, head of collectives research at Charles Stanley, said he could see why trusts did not want to scare away investors by advertising the risks of investing in them when they are on a premium, but he agreed that communication in the sector needed to be improved.
Mr Peters said: “There may come a time soon when the market will anticipate rates going up, and the market might revalue trusts. Then we will see which managers and boards can and want to defend discounts.”
Winterflood data last week showed that the average UK equity income trust is on a discount of just 0.2 per cent, while the average global, Asian or emerging market equity income trust is on a premium.
Meanwhile, the Murray International investment trust, run by Aberdeen’s Bruce Stout, is still trading on a premium of 6.3 per cent to its NAV in spite of issuing more than 1.3m new shares to investors in the past 12 months.
AIC advising members to improve communication to tackle risk
The Association of Investment Companies (AIC), has already been advising its members to improve their communications.
In its most recent conference the AIC devoted one of the main topics under discussion to “planning for a change in sentiment”, in an attempt to develop strategies to cope if and when investor sentiment turns.
At the conference, Numis investment trust analyst Charles Cade said trusts now issuing shares because they are on a premium “should make a commitment to control discounts in future”.
He said: “This means that boards should have a clear buyback policy and stick to it.”
The director general of the AIC, Ian Sayers (pictured), backed Mr Cade’s sentiment and called on investment company boards to communicate their discount control strategies.
One of Mr Sayers’ predictions for 2014 was that there would be “demand for greater clarity on boards’ approach to discounts when sentiment turns”, and he impressed on the trusts the need to communicate effectively these risks to investors.
A spokesperson for the AIC last week added: “It’s also worth remembering, however, that a very large proportion – at least half the sector – has a discount control mechanism in place.
“This has helped keep a floor the discount in recent years. It’s also fair to say that we have seen much lower discount volatility since investment company boards have been able to buy back their shares in 1999, and latterly, to hold shares in treasury for potential reissue at a later date.”
