Much in the papers last weekend about the joys of investment trusts; very little on the real risks, real opportunities and changing trends in the sector. That’s something of a shame – because there is a real evolution under way.
For a more expert view, I’ve turned to Nick Greenwood, manager of both the Miton Global Opportunities plc and the LF Miton Worldwide Opportunities Fund.
The key point to note, says Greenwood, has been the change in the shareholder base of investment trust owners. If you flicked your eye down the shareholder lists of the trusts only a decade ago, you’d have seen pension funds, local authorities and big wealth managers at the top. Today, you are very likely to see self-directed investors (including lots of MoneyWeek readers) who trade through the likes of Hargreaves Lansdowne, AJ Bell and Alliance Trust Savings. Around 40% of investment trust shares are now held by individuals on platforms.
This isn’t in itself a problem for the trusts (I like it – it forces directors to think more carefully about the people actually depending on them to cut costs and make returns), but it does mean more volatility in the industry than in the past – particularly in smaller trusts – it has led to a greater proportion of trades being smaller and electronic.
Expect a lot more volatility in investment trust share prices
In the past, market makers could effectively close the market in smaller trusts by posting bids and offers only valid in modest size. That way, they didn’t have to take large orders that might move the market – and prices could be kept relatively stable.
But now, with lots of small trades coming in electronically, market makers who remain open to them can “quickly find themselves on the receiving end of multiple sales that quickly add up.” They are therefore likely to “quickly remove themselves from the bid”, as will the others. “Thereby a Dutch auction ensues and trust share prices can fall suddenly and sharply. Once buyers are attracted or the market rallies, this process rapidly reverses.”
So far in 2018 there have been two sell-offs in which you could see this happening, says Greenwood. During the global volatility in January, “a number of trusts popular with private investors quickly fell.” Then, in March, just before the end of the tax year, trusts popular with retail investors were “hard hit by a flurry of capital-gains tax selling” at the same time as the market was wobbling anyway.
So, despite no particular movement in its underlying asset values, India Capital Growth saw its discount widen from 4.7% in Jan to 19.9% on 3 April, much of the widening coming in March. The decline bottomed out hours before the tax deadline and the discount was back to 8.3% by the 18th.
Phoenix Spree saw something similar: its shares oscillated between 337p and 380p during April, despite its estimated NAV remaining static around 355p. Meanwhile, Miton Global Opps (MIGO) saw its shares move from a 2% premium on 14 March to a 5% discount on 4 April. This discount had narrowed to less than 1% by the 18th.
The point here is not about the underlying value of trusts (I’m all for them as long-term investment vehicles) but about volatility: if you are an investment-trust buyer, expect a lot more of it.
More closed-end funds are heading to London
The other interesting development is that thanks to the vibrant market in them here, a number of closed-ended funds listed overseas are moving to London in the hope that telling a good story to an interested market will cut their own discounts.
Greenwood has recently taken stakes in three trusts that fit the theme: Stenprop and GRIT (both of which have been listed in Johannesburg) and Life Settlement Assets, (Luxembourg).
Stenprop is moving in the summer. It is still trading on a 20% discount despite operating in an interesting property niche: it is refocusing its portfolio on UK mixed light industrial properties in unfashionable locations such as Mytholmroyd and Huddersfield where there is rising demand and little new supply. Buy in Joburg, reckons Greenwood, and you’ll make an instant profit in more interested London.
Grit Real Estate, which develops African (excluding Nigeria and South Africa) property and leases it to multinationals, applied for a London listing in April and is a similarly interesting proposition. A good business, an 8.25% dividend paid last year and a discount to its NAV of 16%. “We take a vast number of meetings with trust managers which appear uninspiring on paper. A small percentage prove to be gems. This justifies the vast legwork we undertake. GRIT may just prove to be the latest winner,” says Greenwood.
All interesting – but the good news, of course, is that in this new environment these kinds of companies aren’t going to attract the attention of the institutional investors – all the more opportunity for DIY investors with an eye for the interesting, and the ability to cope with more volatility than most.