Why Many Investment Trusts are Trading at a Discount

Thanks to regulation in the advice industry the natural buyers of closed-end funds are dwindling - meaning less demand and the chance to pick up great trusts on the cheap

Emma Wall 3 May, 2016 | 4:02PM
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Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Nick Greenwood, Manager of the Miton Global Opportunities Fund (MIGO).

Hello, Nick.

Nick Greenwood: Good morning.

Wall: So, we're here today to talk about investment trusts. Your investment trust invests in other listed vehicles that are undervalued and this is an interesting time for those undervalued listed vehicles at the moment because a number of investment trusts are trading on a discount. Why is that?

Greenwood: Historically, investment trusts have traded on discounts where the balance of supply and demand – if there are more sellers than buyers, share prices will just keep falling. But it's quite extreme at the moment in smaller trusts because going back not too many years the old-fashioned private client stock brokers were the main users of investment trusts. That whole industry has been consolidated into five or six major wealth manager organizations/chains who wanted to standardize portfolios because of the sheer bulk of the money that they were managing.

And it's very difficult to buy an investment trust right the way across a vast number of clients. And therefore, the traditional buyers have gone for maybe 80% of trusts and if you are a listed company, no natural buyers, a relatively modest amount of selling, share prices will just keep falling. And therefore, discounts in the mid-20s are not untypical for smaller and medium-sized trust these days.

Wall: Because traditionally discounts can signify that there's something wrong with the trust, perhaps something going on with the board and people are dropping those trusts because they don't want to be invested in them anymore. But you are saying now it's not that people actively want to get rid of the trust because they're poor quality, it's that their natural demand has ebbed?

Greenwood: Yeah. I mean, historically, we've looked at buying in at deep discounts and in the past it would tell you there was – the trust was either poorly run or there's an interesting turnaround situation or just perceived poorly, where today it's all about structural change. The natural buyers have gone. They have not been replaced. A lot of these trusts are doing exactly what they say on the tin, it's just the client base is gone.

And we're in a period where these things can be bought incredibly cheaply which is looking to buy trusts at the wrong price and if you can sit and wait, those assets will – it's the structure that's at the deep discount rather than anything wrong with the underlying assets. So, there has been quite a change over the last couple of years.

Wall: This is, of course, quite positive news for retail investors, for those people who are probably watching this video now, it's a chance, as you alluded to there, to pick up high quality assets at a reduced price?

Greenwood: Yeah, absolutely. I mean, it's very difficult for the big chains to actually get their clients into these vehicles because they have to get such a vast amount of cash to work. But if you were a private client buying £10,000 or £15,000 worth of stock, you can get into the price. This illiquidity is a problem for the sector, isn't an issue in private client side.

Wall: Does this mean this is the beginning of the end for investment trusts? You say there has been consolidation in the industry. That is in part down to RDR, so it's just easier for these big houses to buy the books of smaller players. If this is the way that the industry is going, does this mean the end of the investment trust?

Greenwood: Well, the investment trusts keep up holding. It's been around since the 1860s and I suspect that it will be largely a home for alternative assets because investment trusts are superior investment vehicles that are just not user friendly and the biggest advantage is that the fund manager is protected from inflows and outflows.

So, in asset classes such as second handed down policies, property is a good example, infrastructure where the underlying assets are illiquid and not suitable for giving their clients sort of 24 hours being able to deal on a daily basis.

Wall: As we saw in the property crash of 2008 when some open-ended funds had to close and they refused to give people's money back because they couldn't handle it?

Greenwood: In an open-ended fund when you're getting redemptions you're sent into the market. The whole market knows that you are a seller and capital is destroyed. But open-ended do give you typically daily liquidity and that's very important, especially now that the pots of money that have been run are so vast.

Wall: But in the short to medium term a chance to buy some pretty attractive investment trusts?

Greenwood: Exactly.

Wall: Nick, thank you very much.

Greenwood: Not at all.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar

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