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
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
News
people
News
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want it for the fitness tech, or for the style
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

Armenian genocide and the 'good Turks'

To continue to deny the truth of this mass human cruelty is close to a criminal lie
Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

'Lou needed care, but what he got was ECT'

The truth about the singer's upbringing beyond
Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

This human tragedy has been brewing for years

EU states can't say they were not warned
Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

Women's sportswear

From tackling a marathon to a jog in the park, the right kit can help
Hillary Clinton's outfits will be as important as her policies in her presidential bid

Clinton's clothes

Like it or not, her outfits will be as important as her policies
NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace