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Why don't investors like small cap trusts?
by Sarah Miloudi on Mar 28, 2013 at 10:13
With their deeply embedded discounts, it’s easy to assume investors have good reason for giving small cap trusts a wide berth.
But the sector has outperformed its closed-end rivals by 16% over the last 12 months, with UK small cap investment companies up by an impressive 29% year-on-year, versus the 13% UK Growth sector average.
So why don’t investors like smaller company trusts? Be it UK or European-focused, both are discounted to net asset value (NAV) by between 10% and 12%, though virtually every vehicle has delivered double, if not triple-digit returns over three and five years.
In July it raised the trust’s basic management fee to 0.85%, from 0.65%, but removed its 20% NAV outperformance fee. While an improvement, Nimmo’s open-ended fund of the same name has an annual management charge of 0.75%.
Other funds, such as Throgmorton, charge an annual fee of 0.77% on gross assets up to £250 million and a performance fee of 13%. In both the open and closed-end world smaller company trusts do often charge more owing to greater trading and the higher costs of intensive research.
But in a world where passives are taking market share and the retail distribution review (RDR) has launched a raft of Oeic clean share classes, investors could be forgiven for thinking twice about trusts if charges are a bugbear.
Henderson Smaller Companies manager Neil Hermon, who last month along with his board took steps to rein in his trust’s discount, said liquidity is sometimes seen as another drawback, though he argued that as with discounts, these fears are unwarranted.
‘To me discounts are important, but they are not most important,’ he told Wealth Manager. ‘I think sometimes you can get too caught up in the discount, because while it can give a nice uplift if they close, they are not the main driver of performance.’
Managers of larger, open-end funds also seem to be increasingly backing small and mid-sized companies, a move which has gone down well with investors as the likes of Neil Woodford at Invesco Perpetual use a clutch of smaller names to diversify their holdings.
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