Investment trusts face break-up threat

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BRITAIN'S pounds 60bn investment trust industry yesterday began to crack under the strain of hostile corporate activity as a leading Barings trust said it would grant some of the wishes of shareholders who want to break it up.

Barings' pounds 300m Tribune Investment Trust faces demands from rebel shareholders who want the trust broken up and switched into unit trusts, allowing them to realise a rapid gain of 10 per cent overnight.

The gain is possible because shares in Baring Tribune, like other investment trusts, trade at a sharp discount to the value of the assets held. If the trust is unitised, a 9 per cent discount is wiped out and shareholders in Baring Tribune realise a quick 10 per cent return.

Advance UK, an investment fund which specialises in this form of arbitrage, has taken a 2 per cent stake in the trust and persuaded fellow shareholders to back their plan to unitise the trust, which will be put to a vote at an agm next Thursday.

The vote, which could strip Barings of pounds 300m of funds under management, has forced it to announce it will allow people to sell out without being hit by a 9 per cent discount. It insists those who remain with the trust will not see their holdings shrink.

Arbitrageurs have put the investment trust industry under siege by taking stakes in trusts which are perceived to have underperformed (see list).

Advance UK, a pounds 50m fund, takes a small stake in a trust which it wants to target. If it can persuade enough institutional shareholders to come on board, it can force a vote on unitising the trust. Unless minority shareholders muster enough votes to oppose it, they are forced to sell out.

The arbitrageurs have been criticised by City traditionalists such as Iain Watt, the chairman of Edinburgh Fund Managers. They say the "arbs" neglect the interests of minority investors, who invest in investment trusts because of low charges and better performance. The minority shareholders are forced to give up their holdings or shift into a unit trust, where charges can be three times as high.

Fund managers face more open hostility from American arbitrageurs which base themselves in the Cayman Islands and Bermuda. American arbs, trading under names such as Liverpool Limited Partnership and Westgate International Limited Partnership, typically build up a 20-30 per cent stake in an investment trust and then force a vote - or even bid for the trust.

Investment trusts are increasingly being forced to offer share buy-backs or other incentives as the arbs move in. Last week, Kleinwort's Overseas Investment Trust offered to buy back shares and reconstruct itself. Sierra Trading, the New York company behind Liverpool Partnership, rejected this and demanded an egm to put its own proposals.

Peter Walls, an investment trust analyst with Credit Lyonnais Laing, describes the strategy as a form of "green-mail" - forcing a trust to buy back shares at inflated prices.

"The stake has to get to a level where the aggressor has got a powerful or strong position. There has to be evidence that the trust has been underperforming. You have got to feel sorry for the investor who has had a solid investment trust for years. What they are going to be offered is a unit trust with management fees three times as high. If they try to take cash, they face capital gains tax."

As discounts grow, the arbs' arguments become more powerful. In 1994, the average discount was just 3.8 per cent. By last September, this had hit 14.1 per cent. As a result, British investment trusts are increasingly vulnerable.

Trusts under threat

Baring Tribune

Kleinwort Overseas

Anglo & Overseas

Govett Oriental

Foreign & Colonial German

F&C Smaller Companies

British & American

Yeoman Investment Capial

Henderson Greenfriar

Fleming Overseas

Fleming Mercantile

Dunedin Worldwide

Mercury European Privatisation