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Nick Sketch: Investment trusts still make me angry
by Nick Sketch on Apr 20, 2011 at 08:44
About 25 years ago, I was told investment trust pricing was irrational and I should make the most of it because better information, shareholder activism, better governance and freer capital flows would wipe out anomalies in future. In general investment trusts have improved in most of these areas, but irrational pricing is still with us. Unfortunately, so are elements that infuriate those who work in the sector.
Fidelity’s main European unit trust is large, liquid and well run, as is its sister investment trust. The investment trust performance was a bit weak under a different manager, but looks well placed today, yet the discount is 16%. For someone who doesn’t own the investment trust, this looks great. Even if we have no idea when the discount will close or why, the odds are that it will add value in the next few years. However, for an owner of the shares today, who may one day want to sell and who is today the employer of both manager and board, this is unappealing.
The £750 million investment trust will presumably buy back eventually if the situation persists, and clearly this would add at least modestly to net asset value (NAV) and get rid of the supply-demand imbalance and almost all of the discount. Thus, a vigorous approach to buying back stock should be the first response to a discount, not the last – other approaches may be better for potential shareholders or brokers or managers, but not for today’s owners.
Looking instead at illiquid assets, investors buying ITs at launch are often taking a 10-year view. However, they often forget this, become disillusioned and sell quickly. The famous J-curve results, where the discount widens sharply after a few years before eventually recovering, can make for tremendous buying opportunities for those who understand the risks, the investment and the likely time horizon. So much for theory.
Take Cambium Global Timberland . Its share price has been awful, but that does not mean the long-term investment case is broken. At a 30% discount to a fairly conservative NAV, and a starting income yield of over 5%, it looks too cheap. Nothing has changed except the price since I decided it was already undervalued at 70p. I wanted hundreds of thousands of shares in this £70 million company, whose share price suggests it is currently pretty friendless. I was offered 16,000. When I sulked, I was told it was indeed too cheap – and as a result there were no sellers. In which case, 56p isn’t really the price, is it? I can buy any amount of (say) new launch equity income investment trusts (at a premium), but not what looks to me cheap.
Illiquidity, discounts, apparently irrational pricing, short-term decisions from supposedly long-term investors – not much has changed in 25 years after all.
Rensburg Sheppards’ clients have significant holdings in both ITs mentioned.
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