Companies ripe for takeover
Sunday 17 March 1996
But the big general trusts such as Foreign & Colonial, Witan and Scottish Mortgage are a minority. Many of the trusts launched in recent years were much more opportunistic and short-term in their ambitions.Few can expect to survive into prosperous old age.
Some are already approaching their prescribed winding-up dates, while others have failed to fulfil the hopes placed in them and have become vulnerable to takeover or dismemberment.
This has set the scene for ashake-up of the investment trust sector, which could provide good opportunities for experienced investors who can spot likely takeover targets. Hamish Buchan, the investment trust analyst who heads the Edinburgh office of NatWest Markets, said: "The sector is at a point of change. There have been so many issues [of new trusts] that have not been successful. Quite a lot have not been able to get above their issue price."
The shares of poorly performing investment trusts often change hands for substantially less than the net asset value of their underlying investments. This means investors can acquire 100p of assets for, say, 80p. By liquidating the portfolio, say, or changing the investment strategy, predators can sometimes release the additional value to shareholders quickly.
The potential rewards have been demonstrated by Scottish Value Trust, whose manager, Colin McLean, specialises in identifying underperforming funds and prompting a turnaround. Over the past three years, Scottish Value has increased its net asset value by 63 per cent and its share price by 47 per cent.
Mr McLean suggests smaller companies trusts are likely to prove a fruitful area. This is an overpopulated sub-sector with numerous funds on large discounts of up to 18 per cent. Some European and venture capital-type trusts are also vulnerable.
Trusts investing in America have moved on to similarly wide discounts but investors should be more wary of these. The American trusts are reflecting concerns that the US stock market has soared to unsustainable heights.
Numerous investment trusts have undergone changes in their management or capital structure even in the past few months. Peter Walls, an analyst at Credit Lyonnais Laing, said many more were going to come under the microscope in the next couple of years as the younger generation of trusts started to seek shareholders' approval for an extension to their initial lifespan.
John Szymanowski, an analyst at SBC Warburg, expects 1998 to be extremely busy because several split-capital trusts are set to be wound up during the year.
Perhaps the biggest questions surround the future of the two huge European privatisation trusts managed by Kleinwort Benson and Mercury Asset Management. These two funds raised about pounds 1bn when they were launched in 1994, yet their backers have still to see the shares move above the 100p issue price.
The main problem has been the imbalance between the demand for and supply of shares. Mercury European Privatisation (Mepit) has performed reasonably well, yet it still stands at a large discount. Because of the size and profile of Mepit and Kepit, the City will not allow the discounts to remain so large.
Mercury has tried to narrow Mepit's discount by buying in pounds 33.5m shares for cancellation. So far, this has had a negligible effect.
Kleinwort Benson is closely monitoring the progress Mercury makes with its buy-back scheme. It is also trying to increase the strength of demand for Kepit's shares.
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