Morningstar’s latest online panel debate focused on investment trust quirks. Specifically, we looked in detail at discounts and liquidity and the challenges they bring. While both topics have been touched on frequently throughout the Best Advice: Closed-end Funds Forum series, we have yet to drill down into their detail until now.
On the topic of discounts, we discussed whether discount control mechanisms are effective: do they actually work or are they simply providing a level of support for shares? We also looked at the need for boards to give clear guidance on their discount policies—and here we mean a guide to their action at certain levels, rather than needing to specify those exact levels.
When looking at liquidity, there were a range of views on the cause of illiquidity and we discussed ways in which that problem could be addressed. Should it be a deterrent or is it an opportunity?
I was joined by an expert panel, who brought a range of perspectives to the debate. Julian Cane from F&C has managed the F&C Capital & Income Trust (FCI) since 1997 and he deputises Jeremy Tigue at Foreign & Colonial Investment Trust (FRCL). His fund saw around 30% of its share capital bought back around the time of the financial crisis in 2007 and 2008, yet now trades at a modest premium and is able to issue shares. Cane shared his thoughts as a fund manager on how to deal with discounts and premiums and the impact it can have on a portfolio.
William Hemmings, from Aberdeen, is a former fund manager and is now head of closed-end funds. He made the point that, across their fund range, they’re seeing a widening of the shareholder base with platform names abounding. It may not be the big four platforms, which are still to decide their exact strategy post-RDR, but it serves as a good reminder there are numerous others which already offer investment trusts and are seeing their take-up.
Bringing a slightly different angle was Peter Walls from Unicorn. Walls manages Unicorn Mastertrust, which is an open-ended fund that buys investment trusts. He looks for funds that are trading on wider than average discounts and will exit positions when that discount narrows. He’s less worried about it getting to NAV. He sees a wide discount as an opportunity and is reluctant to pay a premium for any of his holdings as he simply doesn’t see the need to pay more than something is worth, for his fund.
James Moseley, head of Investment Trust Sales at Winterfloods was also present. He represented the views of the broker and shared some of the challenges they face, with regards to both discounts and liquidity. His thoughts on the causes of discount were particularly interesting and he rightly pointed out that persistent discounts are an indication of more sellers than buyers, which is in itself another challenge.
It was a lively and informed debate. To listen to the recording and hear these views and more, see the video below.
And, to quote Hemmings: if you don’t understand something about a fund, whatever aspect that might be, ring the manager. Wise words, in our view.
