Trust discount control tools were tested in downturn, did they pass?

Investment trust discount control mechanisms have come increasingly to the fore over recent years, as the closed-ended sector has looked to exert a level of control over its investor base.

The mechanism has been severely tested over the past 18 months as the ravages of the market took their toll and a swathe of investors looked to exit from illiquid positions.

As investor sentiment crumbled alongside liquidity fears, discounts in trusts across a raft of sectors went out to record-breaking levels.

So how effective has this so called ‘hard measure’ been and has it been a more effective tool than softer options such as share buy backs, in controlling the structure of closed-ended vehicles?

Turcan Connell director principal Haig Bathgate says that when markets go through a difficult stage, as in the last quarter of 2008 following Lehman’s collapse, the discount control mechanism option can lose its effectiveness, or at worse become almost an irrelevance.

‘When the markets go through dysfunctional phases like they did towards the end of 2008, the underlying discount control mechanisms are of little use and the market trades purely on supply and demand.’

Bathgate cites the experience of the hedge fund sector as a whole, as a good example of how such mechanisms can lose their effectiveness.

‘The quoted hedge fund sector traded at very wide discounts due to excess supply from hedge fund of funds selling out. It is very difficult to exert any kind of control in such an environment.’

Corazon Capital chief executive Paul Meader (pictured) agrees that the investor base has been a major influence on control mechanisms, and argues that with many trusts being ‘sold rather than bought’ a restructuring process was necessary.