Investment Trusts: Vulture culture to the rescue

still have a place in many portfolios. Here we show how to select a fund and what to look for when you analyse performance figures
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The Independent Online
THE aim of investment is usually to buy an asset at what seems like a good price, wait for its value to appreciate, and then sell out. The vultures circling the panic-stricken pounds 60bn investment trust industry have turned that game on its head: they're buying assets at chunky discounts to their actual value and then forcing their sale at more realistic prices, pocketing big gains from the exercise.

For investment trusts as a whole last year was, quite simply, horrible. The share price of the average trust rose 9 per cent, less than half the rise in the share price of the average UK company over 1997. But it's not surprising that the funds failed to perform. Many were otherwise occupied fighting a rearguard action against powerful groups of speculative investors.

On its own, poor short-term performance should not have been enough to rock the sector. The big problem has been ever-widening gaps between the price of investment trust shares and the value of their assets. By last year the average conventional investment trust share price was at a 13.5 per cent discount to the value of its assets. Some investment trusts' discounts reached 20 per cent or more.

Enter the vultures. The principle of picking off an investment trust is not tough to grasp. Basically, if you buy into a trust on a large discount, you are buying assets cheaply. If you can then quickly reduce the discount, you can sell your stake for more than it cost you. Even if the value of the assets does not increase, the trust's share price appreciates.

There are several ways the predators put pressure on investment trust boards to force discounts down. The first step is to persuade the trust to restructure. If this does not work, other options such as share buybacks can prove fruitful and some trusts have been forced to convert to unit trust status.

American predators are most aggressive. Several US groups of investors, known as arbitrageurs, have taken large stakes in investment trusts on wide discounts and then piled on the pressure. They have even forced two sizeable trusts, Kleinwort Overseas and Fleming Far Eastern, to shut their doors for good, selling their investments with the proceeds going to shareholders. Other trusts have been forced to change fund managers.

At first sight, the whole process looks distasteful. But the predators' action is good news for the small investment trust shareholders who have suffered from the sector's failure and lacked the power to push for change. Last year's string of battles has already forced the average investment trust discount down to about 11 per cent.

However, the position is far from settled. In the next month or so, around 10 trusts will announce their strategies for lower discounts. Others will undoubtedly follow.

q David Prosser is features editor of `Investors Chronicle'.


Aberdeen Asset Management, 0171-490 4466

AIB Govett, 0845 300 9090

Alliance Trust, 01382 201900

Edinburgh Fund Managers, 0800 838993

Fleming Investment Trust Management, 0500 500324

Foreign & Colonial, 01189 828802

AIB Govett (pensions) 0800 252338

IFA Promotion, 0117 971 1177

Invesco, 0800 010333

Ivory & Sime, 0131 225 1357

Merchant Investors Assurance, 0800 373857

The AITC produces a range of factsheets and leaflets about investment trusts including a general pack, performance figures and savings schemes. For free copies, telephone the AITC on 0171-431 5222.

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