Money: Baring beats off vultures to live another day

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The Independent Online
SHAREHOLDERS in Baring Tribune Investment Trust voted 57 to 43 last week against a proposal by Advance UK Trust to restructure the trust and turn it into a unit trust. Advance is one of a growing number of specialist funds known as vulture funds set up to seize control of weakened investment trusts, rip out the assets and gobble them up.

Their opportunity arises because the price of shares in many investment trusts, including Baring Tribune, has fallen far below the value of the assets in which they are invested. Discounts of up 20 per cent are quite common, and any trust that is standing at a big discount is vulnerable to a vulture. Baring Tribune's management has survived, but like many other trusts it will have to fight hard to survive in the long term.

A discount does not mean the investment performance of the managers is particularly bad. On the contrary, statistics show that on average investment trusts have outperformed comparable unit trusts in 26 groups out of 30 in the last five years. The problem is caused by the supply of investment trusts exceeding current demand.

Back in 1994 discounts were down to around 5 per cent and many trust managers decided the time was ripe to launch new trusts aimed at investing in European privatisation stocks. They swept up an estimated pounds 7.5bn of investments but the bonanza failed to materialise and the excess supply has overhung the sector ever since. Other investment trusts have suffered because they specialise in sectors of the market which have performed rather poorly.

Another possible reason for discounts is that investment trusts are rarely recommended by independent financial advisers because handsome commission fees are not forthcoming.

Baring Tribune's investment performance has been quite good, rising 32 per cent in the year to the end of February, putting it in the top 25 per cent of investment trusts.

But it is a generalist fund, investing largely in small companies, whose shares have under-performed the FT-SE index since the start of the bull market,.

In an attempt to reduce discounts, many new investment trust offers have been launched with free warrants which can be traded separately and converted into shares. But investors simply subtract the price of the warrant from the price of the investment trust itself and widen the discount accordingly.

Some investment trust managers have tried to buy back surplus shares, just as companies such as Barclays, the Halifax, BG and GEC have been doing. Unfortunately, investment trust rules only permit them to buy back shares out of income, and also require them to distribute at least 85 per cent of earnings, which leaves little left to support the share price through a buy-back scheme.

Turning an investment trust into a unit trust sounds like an easy option because it eliminates the discount. A unit trust is by definition valued as the sum of its parts. But as David Harris, director of the investment trust trade body AITC points out, the expenses of converting into a unit trust can swallow up part of the extra value released, and the higher annual charges on a unit trust will quickly eat into the rest. There is also a potential exposure to CGT.

q The freephone number given last week for registering with the Share Centre for Thomson Travel Group shares should have read 0500 441144.

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