InvestmentsJan 28 2013

Clamour for ‘zero discount’ policy to give trusts RDR boost

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ByEleanor Lawrie

Calls for major investment trusts to adopt ‘zero discount policies’ were gaining traction last week, as analysts at JPMorgan Cazenove called for the measure to enable trusts to compete under the RDR.

Currently clients who buy into investment trusts run the risk of losing out if the shares fall in value relative to the trust’s portfolio of assets.

But trusts that adopt a zero discount policy pledge to use techniques such as buying up their own shares or issuing new shares to prevent their share prices from falling to a ‘discount’ to the value of their investment portfolios.

JPMorgan Cazenove said many trusts were missing out on a “great opportunity” to compete with their open-ended fund cousins under the level playing field presented by the RDR – under which advisers are now obliged to consider trusts when building client portfolios.

“With many investment trusts trading on narrow discounts or premiums, and issuing shares, we believe there is a great opportunity for some to take a ‘leap of faith’ and introduce zero discount policies to compete more effectively for advisers’ attention,” analysts at the firm said in a research note.

Investment trust trade body the AIC last week gave tentative backing to the calls, with chief executive Ian Sayers telling Investment Adviser he “agreed with the sentiment”.

The trust industry has long been dogged with negative headlines on share price discounts, which some believe make the products too risky to recommend to retail investors.

Last year the UK’s oldest trust, Alliance Trust, came under attack for several months from activist investors over its policy on controlling its discounts.

But just four major trusts are thought to operate such a policy – the £564.6m Personal Assets trust, the £131.8m Troy Income and Growth trust, the £63.4m Mid Wynd International trust and the £31.4m UK Select trust.

Other analyst firms added their voices to the calls for more widespread discount control policies last week.

Iain Scouller, analyst at Oriel Securities said: “For international generalist trusts, such as Foreign and Colonial, Scottish Mortgage, and Monks it might work quite well because they use a lot of blue-chip companies that they can easily sell.”

Innes Urquhart, analyst at Winterflood Securities, said the idea was an “interesting one” and would probably “comfort investors”.

“It’s attractive because they don’t have to worry about liquidity, but part of the attraction of investment trusts is that you can buy on a discount compared to the same open-ended fund,” he said. “If investment trust premiums go to discounts the people that invested will lose that money and boards have to discuss what to do if they fall out of favour.”