New trusts face a shaky start
As the UK stock market is buffeted around on the back of Wall Street, attention is turning to Japan where launches look much more attractive
Sunday 17 March 1996
Schroders, Perpetual and M&G have already attracted investments of more than pounds 300m between them. All three investment houses have solid track records that justify investors' faith in them. Chris Macdonald, managing director of London-based independent financial adviser Brooks Macdonald Gayer, says: "Virtually all of Schroders' trusts go to a premium straight away. If you are going to invest in them, it's best to get in at the beginning."
Likewise, Mr Macdonald believes that the M&G and Perpetual trusts will perform well. He says: "A large number of PEP investors are reinvesting the income back into the trust. This will automatically keep demand up for the shares."
But not all new trusts will get off to such a good start. For starters, the fund management company normally deducts the launch costs - typically 4.5 per cent of the amount invested - from investors' money. This means that for every pounds 1 you invest, only 95.5p goes towards buying investments.
Worse still, most trust shares go to an immediate discount compared to the value of the trust's underlying assets - the net asset value. This is usually because demand for the shares has been sated by the initial launch, and there are no new buyers on the market to push the share price up.
Fund managers have tried to compensate for this loss of value by giving free warrants to investors in a new launch. Warrants are a type of security which confers the right to buy additional shares at a fixed price on a specific date in the future.
But sadly nothing in life is free. Kean Seager, of Bristol-based independent financial adviser Whitechurch Securities, says: "When the warrant is exercised, the net asset value of the trust is diluted between more shares, and the share price falls to reflect that dilution."
Mr Seager says it makes better sense to buy trust shares that are already at a discount. If demand for a particular trust increases, its share price will rise and the discount will narrow.
"That way you can potentially benefit twice over - firstly from growth in the assets of the trust and secondly from the share price catching up with the actual value of the assets," he says. "Three or four years ago, many trusts had fallen to a discount of 20 per cent or more, but the average discount has now narrowed to about 7 per cent."
However, not all discounts will necessarily narrow. Mr Macdonald says popularity of the sector is crucial. He cites the US as an example: "The sector performed fantastically last year, but most US trusts are at a discount of 15 per cent or more. This is because investors think the market has peaked." Many investment advisers also believe the UK market is about to peak.
Japan, on the other hand, is the market that investors have been expecting to happen for several years. As a result, mostJapanese and Far Eastern trusts are trading at net asset value or at a premium, making new launches in these sectors look all the more attractive.
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