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Have buy lists killed trust discount plays?

by Robert St George on Apr 02, 2014 at 13:07

Have buy lists killed trust discount plays?

The ability to buy a basket of assets for less than their true value should be one of the great advantages of the closed-end structure.

Admittedly, that opportunity has dwindled of late. Research from Numis reveals the average discount on an equity investment trust is now around 5%, the tightest level since 2008.

Historically, such narrow pricing has tended to be followed by a derating and a proliferation of double-digit discounts.

But should that occur in the weeks and months ahead – and it may very well not, given the increased adoption of discount control mechanisms – many wealth managers will find it difficult to snap up cheap portfolios because they are restricted by buy lists.

Charles Cade, head of investment companies research at Numis Securities, notes the types of trusts most attractive on a valuation basis also tend to be those that are least appropriate for a buy list – essentially those that are fairly volatile and/or illiquid.

‘Those sorts of funds really can’t feature on a buy list,’ Cade said. ‘You need to be able to invest in size, while buy lists also have to last for six months or more.’

Oliver Tucker, a fund of funds manager at Sarasin & Partners, regrets that this should be the case.

‘If you put the client’s interests first, issues like being able to buy in scale and keeping a fund on the buy list should be the least of your priorities,’ he argued.

Tucker (pictured) accepts that buy lists have a crucial role to play for wealth managers, but contends that they should retain some flexibility.

‘The buy list syndrome turns investment into a science, when it should be an art. Ultimately, blanket approaches lead to peculiar things happening,’ he said. ‘The key to whether a buy list is any good is how well it is managed.’

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