View from City Road: Institutions must not be ignored

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The Independent Online
The courting of private shareholders by investment trust managers has helped to narrow discounts to asset values, but it has not all been good news.

The new-found fascination with private investors on the part of trust managements has tended to be coupled with neglect of institutional investors - who, with about 70 per cent of the shares, still dominate the sector.

Their resulting disenchantment can be clearly seen in a recent survey by NatWest Securities. Twenty-seven of the largest institutional investors in the sector were sent questionnaires and 23 responded - many expressing very strong views.

Chief among their misgivings were ever-rising management fees. Every one of the 31 trusts that have been in the FT 250 Index since 1984/85 has at least doubled its expenses in that time; 23 of them have at least trebled their expenses; 12 of them have quadrupled their expenses; and one, Fleming Japanese, has seen its expenses rise by five times. Meanwhile, the Retail Price Index has risen just 60 per cent.

Admittedly, as the NatWest team says, a significant narrowing of the discount is a much more powerful way of enhancing shareholder value than finding small savings in management expenses. Between December 1984 and August 1993, the arithmetic average discount on the FTA 250 trusts had narrowed from 24.4 per cent to 8.4 per cent. At a rough estimate, some pounds 2.5bn has been added to the market capitalisation of these trusts.

But for other institutional complaints, such as 'cosy' boards, of tame directors, and the lack of consultation with shareholders over important corporate changes, there can be no excuse.

With trusts' net assets now standing fairly close to par, there is little room for further narrowing of discount. Without this sweetener institutional shareholders may become less forgiving and trust management may have cause to regret forgetting them.