13th March 2014
With investment trust discounts at historic lows, a leading analyst says it is still difficult to tell if this is a structural shift due to changes in regulation or cyclical re-rating. Speaking at the Association of Investment Companies’ director conference, Charles Cade, head of investment company research at Numis Research says trusts should take advantage to set out buy back strategies.
More than 100 investment companies are now trading at a premium representing more than 30% of the universe by market cap.
Cade says: “Discount controls are now widespread and the retail distribution review has created a more level playing field with open-ended funds. On the other hand, much of the rerating can be attributed to a strong recovery in markets since the financial crisis, as well as the demand for investments that pay an attractive yield. As a result, discounts could be vulnerable to a market correction or a rise in interest rates.”
Cade says trusts should be taking advantage of the situation however by embracing a clear buy back policy.
“I believe that boards seeking to grow their companies by issuing shares at a premium should make a commitment to control discounts in future. This means that boards should have a clear buyback policy and stick to it. We do not advocate that a “zero” discount control is appropriate for all investment companies, particularly for those with less liquid portfolios or cyclical mandates. However, this is not an excuse for boards to ignore discount controls and more innovative solutions such as periodic exits or finite lives are worth considering.
“Discount controls are far easier to introduce from a position of strength when a fund is already trading close to NAV. Similarly, takeovers and mergers are easier to complete when discounts are tight as investors are less likely to seek a cash alternative.
“Now is also a good time for Boards to evaluate fee structures and to consider changes in mandate and manager in order to remain competitive in the post-RDR investment environment. I believe the long term “winners” from RDR will be the larger investment companies with limited discount volatility, attractive fee structures and good performance records that are differentiated from open-ended funds and ETFs.”