Playing safe and not sorry is the best option

By Keiron Root

By Keiron Root

19 July 2000

Warrants and Value Investment Trust, run by Scottish Value Management, is the only investment trust in the UK focusing on a portfolio of warrants.

They work in a similar way to options and are linked to individual shares. A warrant confers on the holder the right, but not the obligation, to buy shares at a fixed price on a specific date, or during a specified period, after which the warrant expires.

There is a stable of trusts at Scottish Value, a company set up in 1990 to manage funds in line with the principles of "value investing". The trust's manager, Donald Robertson, was involved at the start of the company, with the firm's founders, Colin McLean and Margaret Lawson, and has managed the trust since its launch in 1993. The rationale behind the trust is to allow investors access to the warrant market while lessening the risks of investing in individual warrants.

"Since warrants are a wasting asset, it is important to mitigate against asset losses and we do this by imposing a rigid stop-loss policy," says Mr Robertson. "The drawback of such a defensive stance is that, when you do get a very positive move up in the equity market, you tend not to participate fully in all of the gain.

"We don't worry necessarily if a warrant heads down, if it still has a reasonable amount of time to expiry, but unless we can see an immediate improvement in its market, we will exit a warrant position when it only has six months to run.

"Warrants are the opposite of equity investments, where the assumption is that they will gain in value over time. With a warrant, you have to assume they lose value as the exercise date approaches."

But warrants do offer considerable potential profits, since they enable investors to buy shares at a fixed price. If the share price rises significantly above the exercise price, large instant gains will be made. This is the "intrinsic value". They are also highly geared investments - any movement in their prices, up or down, is magnified in terms of the profit (or loss) to the investor.

Mr Robertson says: "I started at Ivory & Sime in 1982 as a junior member of the administration staff. I moved on to doing venture capital and ended up running a couple of funds."

He sees his venture capital training as important for his current fund, since the key part of establishing the intrinsic value of a warrant is assessing the prospects for its underlying share. "It was a good grounding looking at companies as companies, and not just as investments," he says.

Warrants & Value initially concentrated on warrants issued by other investment trust companies. "We didn't have to look elsewhere because there were lots of opportunities in that sector. In the subsequent retrenchment of the sector we had problems. Since warrants are a decaying asset, in a downward cycle they can destroy a portfolio.

"So, at the end of 1994, we looked to widen the net to more buoyant sectors and markets, and we had BTR, Westland Helicopters and Belgian and Indian government bonds. By the end of 1995, we were down to about two-thirds investment trusts, one-third other issues. The investment trust portion has continued to come down, and the split is about fifty-fifty.

"The year 1993 and the early part of 1994 were good times for investors and the fund went up 50 per cent in its first six months. During t hat period, you didn't have to be particularly good at investing, you just put your money into the market and watched it grow. Since then, market conditions have been more difficult.

"One-third of all of the warrant issues around in 1993 have expired worthless. Within our portfolio, the figure is about 10 per cent. Avoiding the disasters is almost as important as picking those issues that are going to give an uplift."

Mr Robertson says he focuses on intrinsic values. "Maybe by doing this we are not getting into the highly geared issues, but we are also not paying through the nose for that potential uplift. For warrants with a high level of gearing, you are often paying a premium of 10 to 15 per cent, which means your investment has to rise that much before you start to see a profit."

Warrants & Value has a global investment brief. Mr Robertson says: "The fund tends to be underweight in America, because we have roughly one-third of the portfolio in what we would class as proxies to America, ie Latin America and the Far East. Because of their link to the dollar, they are very much geared plays on the US. We have one-third in Europe, one-sixth in the UK and the remainder in what we class as defensive investments.

"We have been criticised for not going for all-out growth, but I don't think our shareholders really want a white-knuckle ride. If that's what they were after, they would invest in the underlying warrants themselves."

PROMOTED VIDEO
Life and Style
Phillips Idowu, Stella McCartney and Jessica Ennis
fashionMcCartney to continue designing Team GB Olympics kit until 2016
Sport
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
football
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
Farah returns to the track with something to prove
Commonwealth games
Life and Style
fashion Designs are part of feminist art project by a British student
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Junior Research Analyst - Recruitment Resourcer

    £18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

    Senior Analyst - Financial Modelling

    competitive: Progressive Recruitment: This really is a fantastic chance to joi...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    Day In a Page

    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
    Climate change threatens to make the antarctic fur seal extinct

    Take a good look while you can

    How climate change could wipe out this seal
    Should emergency hospital weddings be made easier for the terminally ill?

    Farewell, my lovely

    Should emergency hospital weddings be made easier?
    Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

    Crowdfunded novel nominated for Booker Prize

    Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
    Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

    Vladimir Putin employs a full-time food taster

    John Walsh salutes those brave souls who have, throughout history, put their knives on the line
    Tour de France effect brings Hollywood blockbusters to Yorkshire

    Tour de France effect brings Hollywood blockbusters to Yorkshire

    A $25m thriller starring Sam Worthington to be made in God's Own Country
    Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

    Will The Minerva Project change the face of higher learning?

    The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
    The 10 best pedicure products

    Feet treat: 10 best pedicure products

    Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
    Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

    Commonwealth Games 2014

    Great Scots! Planes and pipers welcome in Glasgow's Games
    Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

    Jack Pitt-Brooke

    Manchester City and Patrick Vieira make the right stand on racism
    How Terry Newton tragedy made iron men seek help to tackle their psychological demons

    How Newton tragedy made iron men seek help to tackle their psychological demons

    Over a hundred rugby league players have contacted clinic to deal with mental challenges of game