Outlook: Small holders lose out in trust hunt
Tuesday 03 March 1998
The latest investment trust to fall victim to their money making ends is Overseas Investment Trust, a pounds 200m trust managed by Morgan Grenfell Trust Management. Just before Christmas, a group of US based arbs bought into the trust and forced the board to bring forward proposals for unitising its assets. Yesterday the trust's chairman, Richard Heseltine, resigned in disgust, saying he could play no further part in the process. What's going on here?
There's nothing new in what OIT is being subjected to. Nearly all investment trusts trade at a discount to their net asset value. That discount can be eliminated through unitisation. A turn is to be had by forcing the process. How big a turn depends on the size of the discount.
The curious thing about this trust is that it is so small. Normally, arbs target poorly performing trusts which trade at big discounts. But actually OIT hasn't done badly at all in recent years, consistently recording double-digit gains in capital value. The arbs were therefore forced to buy in at a discount of just 9 per cent. By the time liquidation costs are taken into account, they are unlikely to end up with any more than half that - hardly, it might be thought, worth the time value of the investment. Still, if there's a dime to be had, an arb would sell his own grandmother to get it, and since this is the free market, why not?
One reason is that unitisation or liquidation is generally not in the best interests of ordinary, long-term investment trust shareholders. Because investment trusts have independent boards of directors, whose job it is to safeguard the interests of shareholders, their ongoing management costs are generally much lower than a unit trust, whose purpose is that of earning fees for the manager.
Take the example of Kleinwort Benson Overseas Investment Trust, which is also being unitised, again under pressure from arbs. The trust's annual management charge was a half a per cent of the assets. The Save and Prosper unit trust that will replace it will charge one and a quarter per cent. Furthermore, the new unit trust will invest predominantly in investment trusts, in effect doubling up on the cost of asset management. The discount may disappear, but it is not clear this compensates long-term investors for the many countervailing advantages of investment trust status.
There's a wider point too. OIT was established so that British investors could invest overseas - not to enable overseas arbs to invest in Britain, strip out the discount and then ship it back to the Bahamas. There's not obviously anything that can be done about all this, but it's a rum old business all the same.
- 1 Home Office says Nigerian asylum-seeker can’t be a lesbian as she’s got children
- 2 What happens to your body when you give up sugar?
- 3 Drugs Live cannabis trial: Hash is less harmful than any other drug, expert claims
- 4 Turkish Airlines flight TK 726 crash-lands on Nepal runway amid dense fog
- 5 Apple and Google users being spied on for a decade because of 'Freak' security flaw
The City of the Monkey God: Archaeologists claim to have found city lost for 1,000 years in remote Honduran jungle
Turkish Airlines flight TK 726 crash-lands on Nepal runway amid dense fog
Japanese island overrun with cats after population explodes
London property boom built on dirty money
Becky Watts: Stepbrother and his girlfriend named locally as two arrested on suspicion of murder
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Durham Free School: 'Creationism taught at' free school facing closure
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
Ukip would cut billions from Scottish budget to fund English tax cuts
End of the licence fee: BBC to back radical overhaul of how it is funded
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
iJobs Money & Business
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...
£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...
£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...