Chelverton Small Companies Dividend (SDV) – the number one UK Equity Income investment trust over five years – is testing investor appetite for a £75 million C-share issue.
If successful this would make it one of the biggest fund raises by an investment trust in developed stock markets this year. It would also more than double the size of SDV, which has a market value of just £48 million.
Despite the stock-picking skills of managers David Horner and David Taylor helping to generate an impressive 239% five-year total shareholder return that has beaten investor favourite Nick Train's Finsbury Growth Trust (FGT), SDV’s highly-geared ‘split capital’ structure and volatile history have discouraged some investors in the past.
With the company due to refinance in January, it hopes to put that right with the issue of up to £75 million new ordinary shares that both professional and private investors can buy. These will be 'C'-shares that will in due course convert into the trust's existing ordinary shares.
At the same time it plans to issue £30 million new zero dividend preference shares to replace its existing ‘zeroes’ maturing on 8 January.
‘In light of the company’s strong and sustained track record as well as the availability of attractive investments, the board believes that it is an appropriate point to seek to increase the size of the company and raise additional capital,’ the company said in a stock exchange announcement.
New zeroes, new life
Under a split capital structure, an investment trust uses zero shares to borrow money from investors. As their name suggests, zeroes offer a pre-set amount of capital growth but pay no dividends. All the dividend income they would normally get plus the excess capital return passes to the ordinary shareholders who get more bang for their buck.
SDV’s new zeroes will have a life of 7.3 years and offer a gross redemption yield – or annual capital growth – of 4%. Although less than the 6% on its existing zeroes, the offer is likely to be attractive as the number of such shares has dwindled since the splits scandal at the start of the century when many split cap trusts collapsed due to their high borrowings and cross-holdings with other splits.
While the share placing, intermediaries offer and subscription offer would be available to all investors, Horner has stated his ambition to increase the backing from wealth managers. ‘I want to raise £10 million from each of the six big wealth managers to get over £100 million,’ Horner said in an interview with us last month.
Despite its glittering track record, raising £75 million will be a tough target for Chelverton Asset Management, Horner’s company, and SDV’s stock broker Stockdale Securities. Although this has been a strong year for investment trust share issuance – with nearly £8 billion raised in the first 10 months, according to Winterflood Securities – the bulk of this, around £6.3 billion, has poured into specialist asset classes and property.
By contrast, trusts in developed market equities have been far less popular as the decision last month of Daniel Godfrey to pull the flotation of The People’s Trust, due to a lack of investor support, proved.
Of the £1.26 billion raised by trusts in developed market equities, the majority has gone to the handful of big, popular funds that regularly issue new shares. So far this year Scottish Mortgage (SMT) has raised £260 million, Personal Assets (PNL) £89 million and Finsbury Growth & Income £85 million, according to Winterflood.
Excluding these retail investor favourites, hitting £75 million would make SDV the biggest equity trust fund raiser of the year, after Aberforth Split Level income (ASIT), another split trust which raised over £237 million in its reconstruction in July. It would beat ScotGems (SGEM) and Downing Strategic Micro-Cap (DSM) which raised a respectable £50 million and £56 million at their respective global and UK smaller company fund launches in the spring.
It’s a tough ask but with SDV’s track record, anything is possible.