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.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all