Taking a deeper dive into investment trust discounts

Investment Trust shares can trade at a discount to their true value. Alice Rigby of Kepler Partners looks at what Trust boards can do about it.

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  1. Kepler Partners

Discounts and premiums are often the first thing that pop into investors’ minds when they think about investment trusts – and rightly so. Discounts and premiums mean an investment in a trust a fundamentally different beast, with a range of outcomes including the potential for downside protection and accelerated returns.

While discounts reflect the inefficiencies of markets, however, and can for some investors be among the most attractive aspects of trust investing, for some boards they can be a perennial headache. Trusts can sit on persistent discounts over time, seemingly in spite of performance or market sentiment towards the sector, whereas other trusts can experience inexplicable volatility in their discounts, leading to wariness from some potential buyers.

In response to these challenges, we are seeing an increasing number of boards take strident action to try and wrest control of their discounts. Here, we discuss some of the more original approaches we’ve seen.

Miton Global Opportunities

Until fairly recently Miton Global Opportunities had a discount problem, rarely trading on a discount of less than 10% in the last ten years. The board took decisive action in 2015, appointing a new broker, hiring Frostrow Capital to market the trust, and introducing a ‘realisation opportunity’ allowing investors to exit the trust every three years.

Shareholders who elect to leave the trust see their shares moved into a realisation pool comprising the assets attributable to them, taking the negative pressure off the shares for those who wish to remain invested. The assets in this pool are then managed in accordance with an orderly realisation programme with the aim of making progressive returns of cash to holders of realisation shares as soon as practicable.

The trust’s discount has narrowed sharply as a result of these various innovations, and retail interest in the trust has increased significantly. Trading via platforms has rocketed, taking private investor ownership of the trust from 9% to around 50%.

NB Private Equity Partners

The NBPE discount has been the subject of a number of board-led initiatives over the past few years. The latest was achieved last year where, in an effort to consolidate liquidity and reduce costs, the board delisted the company’s shares from Euronext on 20 December 2018, and listed a new US Dollar denominated share quote on the London Stock Exchange (Ticker: NBPU). In addition, the board entered into a new share buyback agreement with the company’s broker, with re-purchases made on the board’s behalf within the confines of “multiple factors…including the absolute level of discount, NBPE’s discount compared with peers and broader equity market movements, among other factors”.

Within this, the board has stated that this is not a systematic buyback programme. The company has bought shares back opportunistically in the past at extreme levels – and was last seen in the market in 2010/11. As of 30 April 2019, within the new buyback policy, the company has bought back and cancelled 1,505,296 shares, the last purchase being at 1090p – the same as the current share price in the market at the time of writing. According to the company, these buybacks have been made at a weighted average discount to NAV of 20%, resulting in a NAV accretion of approximately $0.11. This development marks the latest in a number of initiatives taken over time to reduce the discount. In May 2017, the shares were given full voting rights and achieved a premium listing on the LSE. The company joined the FTSE All Share Index and FTSE Small-cap Index in June 2017.

BH Macro

BH Macro’s discount widened during the 2008/9 financial crisis. We believe that this was because at the time it had launched relatively recently, and many market participants didn’t fully understand the strategy or how the fund was generating its strong positive returns. Conversely, the NAV performance during that period should have given confidence to investors. In time the discount did narrow. However, the past few years have seen the discount widen despite a large number of repurchases of shares by the board and a tender in 2016.

In early 2017, the board decided on a package of robust discount control measures including another tender offer in 2017. Under these proposals, the board agreed that it would not buy back any shares before 1 April 2019, but would hold a discontinuation vote for either class of share if it traded at an average discount of 8% or more to the monthly NAV over CY 2018. Over 2018, as markets have become more volatile and the performance has picked up, a narrowing discount means that the discontinuation vote will not be triggered. At the time of writing, the shares trade on a slight discount to NAV of c. 1%.

Disclosure

Miton Global Opportunities, NB Private Equity Partners and BH Macro are clients of Kepler Partners. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security or securities discussed. See www.trustintelligence.co.uk for more information.

This content is supplied by the named third party and does not represent the views of Charles Stanley. Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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