Leading financial advisers called for the restructurings last week as the managers of Mercury European Privatisation investment trust (Mepit) promised further action aimed at boosting investors' returns from the trust. Meanwhile, managers of Kleinwort European Privatisation (Kepit) announced the latest in a series of moves aimed at improving returns from its trust.
Converting into unit trusts could give a 10 per cent gain in value to investors, allowing Mercury investors who wanted out to get their original money back, and getting rid of a large chunk of losses from Kleinwort's.
Advisers accuse the boards of directors of these trusts - who are there to act in the interests of investors - of not asserting themselves enough over the investment managers, who are two of the biggest financial institutions in the UK and who stand to lose fee income if the trusts convert.
More than 150,000 small savers shovelled pounds 1bn into these funds when they launched at the start of 1994, making them two of the most popular launches ever. But they have since lost money - around 8 per cent on Mepit, which is managed by the UK's biggest pension fund manager, and 14 per cent on the Kleinwort Benson trust, another big name City institution.
Investors in either could benefit from an immediate boost of up to 10 per cent in the value of holdings if the funds switched from being investment trusts to unit trusts.
"I'd love to see a unitisation," says BESt Investment's John Spiers. Mike Scott, investment director at Bristol-based advisers Hargreaves Lansdown says: "Investors are very unhappy - [effectively] they've lost four years' building society interest."
The main reason why the trusts have been such bad investments is a function of their investment trust structure. The shares they have invested in - mostly privatisations on the Continent - have not done too badly,but the trusts themselves have not kept pace. Both have moved to wide discounts to the value of their underlying investments (called Net Asset Value), resulting in losses for the launch investors.
Both trusts trade on discounts to NAV of more than 15 per cent, compared with 8 per cent for investment trusts as a whole. But by converting into unit trusts they would effectively trade at asset value - hence the uplift in value if they unitised. Unit trusts do not have this discount problem.
Managers Kleinwort Benson this week put in place moves which it hopes will help narrow the discount on Kleinwort European Privatisation by boosting demand for the trust's shares and without converting into a unit trust. These included a new advertising campaign in specialist media for financial advisers and a share exchange allowing investors to sell their own shares for free if they reinvest in Kepit. Mercury also said it was planning new initiatives to put to the board of Mepit aimed at narrowing the trust's discount, but these did not include unitisation.
"They won't unitise because they don't want to lose the money under management," said Hargreaves Lansdown's Mr Scott. Derek Larcombe, managing director of Foster & Braithwaite Fund Management, which runs a number of funds that themselves invest in investment trusts, says unitisation would lead to "massive liquidation". Both trusts are around pounds 500m now but could shrink to pounds 200m, maybe even pounds 100m on unitisation, says Mr Larcombe. This would directly hit the fees paid to the managers. These are currently around pounds 3m each a year and are calculated as a direct percentage of how much money is under management in the trusts. For managers, investment trusts have the advantage that, when investors sell, the money under management in the trust - and therefore their fee - does not shrink. When investors sell their unit trusts, the fund, and therefore the manager's fee, does shrink.
The chairman of the board of Kepit, Irish politician Shane Ross, denied that the Kleinwort trust board was not asserting itself sufficiently over its manager. Unitisation is "constantly under review", he said.
Other ways of reducing the discount might be to shrink the trust, but keep it as an investment trust or create different classes of share, say analysts.
Ironically, the two investment trusts are on the buy lists of many stock brokers for investors who want to invest in Europe. The deep discounts these trusts are at to the value of their underlying investments makes them cheap even if there is no restructuring.Reuse content