With discounts on investment trusts at record lows, are discount control mechanisms still relevant?
Average discounts to net asset value (NAV) fell below 3.5% in January, the narrowest since records began in 1970, while several sectors are trading at a premium.
Speaking at the Association of Investment Companies’ annual conference, Alastair Smith, managing partner of Frostrow Capital, said trusts cannot get complacent and the best protection against discounts widening is good investment performance.
‘If you think about why an investor buys shares of investment companies, it is to access the long-term NAV return. It is the volatility of discounts investors do not like,’ he said.
‘There is a very good argument to be made for saying we are going to issue shares at a premium but also saying that if times are harder and performance is going through a bad time, people can get an exit at any time.
‘If the door is only open once, they will all want to leave the room. But if the doors are always open, people will be more likely to stay a shareholder.’
Chris Hills, chief investment officer at Investec Wealth & Investment, believes that simply having a discount mechanism in place can have an impact and an almost self-regulating effect.
‘There is a point that the psychology behind the ability to tender or exit means you never really need to use it because the share price will never test the boundary,’ he said.
Smith said investment trust boards should also allow the company to shrink in the short term if it is in the best interests of shareholders.
Commenting on the ability of investment trusts to buy back their own shares and hold them in treasury, he said: ‘What we found is, if you are doing it at quite small levels then it is actually good in the long run because you are able to place shares with new shareholders, and grow the trust, which are all good things.’He added: ‘If you have an imbalance in your share register, there is nothing wrong with treasury if that gives you time to either orchestrate a better disposal of some of your liquid assets or potentially reissue, as long as it is not to the detriment of any shareholders. That is quite different to a global blue chip fund.’