Better returns on asset values
Professional vultures are moving in on trusts trading at deep discounts. David Prosser considers the pickings for small investors
To find the cause of the current crisis, go back to 1993. This was the height of investment trust popularity, so many managers launched a string of new funds or raised more money for their existing trusts. The mood was buoyant, with demand exceeding supply for many launches.
Since then, it's all been downhill. Most investment trusts, especially some of those new issues, have performed disappointingly. Even more damaging, the share prices of many trusts have slipped to wider and wider discounts to the value of their assets.
With too many investment trust shares in issue and prolonged middling returns, the situation became serious last year. The average trust discount reached 13.5 per cent, but that masked many discounts of over 20 per cent.
John Szymanowski, an SBC Warburg analyst, reckons something has to give. "Funds with mediocre performances, poor strategies and wide discounts are going to be picked off," he warns.
And that's exactly what has been happening. Several large predatory investors have taken big stakes in some of the weakest trusts and forced change. Their strategy is simple: if you buy assets at a big discount to their value and then make the trust take action to reduce that discount, you profit without the value of the trust's assets having to grow.
In fact, two types of predator are at work. First, stronger trusts, such as Scottish Value, have been buying into their weaker rivals and putting pressure on their boards. Advance UK, christened a "vulture fund" by many when it was launched last year, raised pounds 50m from investors backing this philosophy. Second, privately owned US companies, known in the industry as arbitrageurs, are pursuing a similar strategy.
Initially, the predators use their stakes to press the weaker trusts' boards into cutting discounts through restructurings, share buy-backs or conversions to unit trusts. If this doesn't work, they have several options, in some cases forcing takeovers or the replacement of a trust's manager.
In high-profile victories, the arbitrageurs have even forced Kleinwort Overseas and Fleming Far Eastern, two large funds, to close, selling their assets and distributing the proceeds to shareholders. In response to predatory activity, a string of trusts, including Baring Tribune, Broadgate, Continental Assets, Henderson Greenfriar and Overseas, are all preparing proposals to reduce discounts.
Not surprisingly, discounts have fallen as a result of all this activity. But Mr Szymanowski thinks the battle is far from over. "There's further to go" he says. "Performance itself is no longer a guarantee of survival. Not only must you perform, you must also keep your discount down."
Peter Walls, an investment trust analyst at Credit Lyonnais, agrees. "I think more deals will be announced even though there's so many already on the menu," he says. Mr Walls believes the opportunism of the predators, combined with the dissatisfaction of many smaller shareholders, will result in yet more rationalisation.
This is all good news for investors. Falling discounts will unlock the value held by many trusts. In some cases, restructurings and wind-ups have quickly released sizeable profits from trusts on wide discounts.
But be careful playing the game yourself. Small investors have less influence than the predators. And, as Mr Walls points out, poor performance negates the effect of lower discounts. "Buying on a 15 per cent discount is fine," he says, "but if you lose 30 per cent of the assets in six months, it's not very profitable."
David Prosser is features editor of `Investors' Chronicle'.
Independent Partners: See how much you could save by switching credit cards. Compare now
peopleContenders for Time magazine's Person of the Year are a mixture of the good, the bad and the holy
newsAs the world remembers Mandela the hero, the prison where he spent 27 years seems all the more brutal
tvSteven Moffat reveals the actor was dying to take on the role of the Time Lord and says he is excited to see what he will do with the character
sportBayern Munich 2 Manchester City 3: City come from two down to beat reigning European Champions
arts + ents... and a chance to paint Booker Prize winning author Hilary Mantel
danceUnder Tamara Rojo's inspired direction, it seems possible that it could challenge the dominance of the Royal Ballet. We meet some established names and rising stars
travelDiscover Uruguay's jet-set beach resort, an Atlantic enclave with plenty of art and culture to explore on the side
- 1 It’s shameful that our universities have accepted gender segregation under pressure from the most oppressive religious fanatics
- 2 Sir Ian McKellen hits back at Damian Lewis' 'fruity actor' claims
- 3 Kenyan politician Mike Sonko left red-faced after photoshopping himself next to Nelson Mandela
- 4 Selfie at funeral: Cameron squeezes in on Obama snap at Mandela memorial
- 5 Is Facebook making us forget? Study shows that taking pictures ruin memories
- < Previous
- Next >
iJobs Money & Business
£50000 - £65000 per annum + BONUS + BENEFITS: Harrington Starr: A leading mark...
£60000 - £85000 per annum + BONUS + BENEFITS: Harrington Starr: A leading asse...
£45000 - £70000 per annum + Bonus + Benefits: Harrington Starr: Technical Impl...
£65000 - £90000 per annum + Bonus + Benefits: Harrington Starr: Rogue Trading ...
Day In a Page
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.
A six-bedroom detached period property with secluded gardens, ample parking and a double garage in Rye, £675,000.
A large split-level property with three double-bedrooms and roof terrace, close to Crouch End Broadway, £625,000.
A charming barn conversion in the picturesque Cotswold village of Ilmington with three bedrooms, a detached garage, workshop and beautifully manicured gardens £675,000.
A three-bedroom new build, ground-floor flat with two bathrooms, close to Bermondsey tube, £445,000.
A three-bedroom house in an enviable new development moments from Oxshott High Street, with secluded garden and decked area, £385,000