Outlook: Small holders lose out in trust hunt

INVESTMENT TRUSTS are hardly yet an endangered species. At The Independent, and in most other national newspapers, more listings of investment trusts are carried than for any other sector. Even so, these usually inoffensive creatures are being hunted as never before. Nor are we talking here about the relatively harmless antics of the countryside alliance. The hunters in this case are arbitrageurs, generally of the overseas variety, and they come armed not with horse and hound but with kalashnikovs and magnums.

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.

News
peoplePaper attempts to defend itself
Voices
voicesWe desperately need men to be feminists too
Life and Style
food + drink
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Project manager - Web E-commerce

£65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits