Better returns on asset values

Professional vultures are moving in on trusts trading at deep discounts. David Prosser considers the pickings for small investors

The pounds 52bn investment trust sector is having a rough ride. As a whole, it produced a 9 per cent return over 1997, not even half as good as the performance of the UK stock market. Worse, from managers' point of view, a group of opportunistic investors is circling the sector, picking on vulnerable trusts one by one.

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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Recruitment Genius: Online Customer Service Administrator

    £16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

    Recruitment Genius: Digital Marketing Executive

    £18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

    Day In a Page

    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
    'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

    'Queer saint' who bankrolled artworld giants

    British culture owes a huge debt to Peter Watson, says Michael Prodger
    Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

    Pushkin Prizes brings countries together

    Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
    14 best kids' hoodies

    14 best kids' hoodies

    Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
    Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

    The acceptable face of the Emirates

    Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk