InvestmentsJan 28 2013

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

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

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.”

Charles Cade, analyst at Numis Securities, said a zero discount policy had worked for Troy Asset Management’s Francis Brooke because of its “defensive investment approach” and “good reputation”.

“Investors won’t sell that stock if they get worried,” he said.

“This idea is appealing for mainstream, global growth and UK funds. If you are a smaller or more cyclical fund everyone could want to buy and sell at the same time, and you don’t have the liquidity.”

However, advisers who buy investment trusts have said the existence of share price discounts and premiums creates welcome opportunities to generate extra gains from trust investing.

Philip Milton, managing director of Philip J Milton & Company, said he saw discount control mechanisms as counterproductive.

“I don’t really agree with rigid discount control mechanisms,” he said.

“They become a snake-eating-tail exercise and I much prefer to see more proactive boards and brokers to create a better market in the shares.”

“I’d like to see ‘treasury’, and not immediate cancellation, of re-acquired shares used more often to diminish spreads and to facilitate sensible buying and selling so that holders know they can trade in sensible quantities.”

Viable candidates: who could adopt a zero discount policy?

Foreign and Colonial

Size: £1.9bn

Manager: Jeremy Tigue

Sector: Global Growth

Founded: 1868

The trust has a strict discount control mechanism of no more than 10 per cent. In 2011, manager Jeremy Tigue said the trust’s buyback policy had been successful since its introduction in November 2005.

Monks

Size: £818m

Manager: Gerald Smith

Sector: Global Growth

Founded: 1929

Monks, which is run by Baillie Gifford, does not operate a formal discount control mechanism, but has bought back shares in recent months as its discount widened out to the mid-teens.

Perpetual Income and Growth

Size: £666.5m

Manager: Mark Barnett

Sector: UK Growth & Income

Founded: 1996

At a 1.6 per cent premium, the trust trades close to its net asset value and invests a lot in blue chip companies with high liquidity. The trust’s board said that it closely monitors the discounts of other trusts in the sector.

AIC view: Ian Sayers

Ian Sayers, chief executive of the AIC, said he was cautiously in favour of at par discount control. “I agree with the sentiment,” he said. “Absolute discount is an issue, volatility is unattractive, and this does give boards more options.

“A lot of trusts have moved to premiums and can issue shares to meet demand.

“They need to look at what they are going to do if sentiment turns.”

The four trusts with a zero discount policies

Personal Assets

Size: £564.6m

Manager: Sebastian Lyon

Current disc/premium: 0.8%

Founded: 1983

Mid Wynd International

Size: £63.4m

Manager: Michael MacPhee

Current disc/premium: -2.7%

Founded: 1981

Troy Income and Growth

Size: £131.8m

Manager: Sebastian Lyon

Current disc/premium: 0.8%

Founded: 1988

UK Select

Size: £31.4

Manager: Simon Brazier

Current disc/premium: -1.5%

Founded: 1953