Henderson Opportunities Trust raises dividends 24% and switches to quarterly payments as the small small-cap fund seeks to win back investors and survive.
With just five weeks before its three-yearly continuation vote, Henderson Opportunities (HOT ) is ramping up its dividends and switching to quarterly payouts as it strives to appeal to income investors and narrow the big discount on its shares.
But keeping sweet the wealth managers that own the smaller companies focused trust is not just a matter of short-term survival and garnering votes for the annual general meeting on 19 March.
The board of the investment trust – the smallest and riskiest of fund manager James Henderson, who also runs Lowland (LWI ) and Law Debenture (LWDB ) – will also be acutely aware that the biggest buyers of closed-end funds are increasingly turning away from those with a market value below £100m.
According to Winterflood Securities, just 42% of the wealth managers, analysts and professional investors surveyed at its annual conference last month said they would invest in investment trusts under £100m. That’s down from 55% a year ago and 71% in 2013 when the broker first asked delegates the question.
The trend is clear and it’s not good for the 70 trusts, such as HOT, which lie below the threshold and face an uncertain future if their shares become increasingly illiquid (hard to trade) and unattractive to investors.
‘While some of these are in managed wind-down, we believe that it is essential for those ongoing vehicles to have plans to grow if they wish to continue to remain relevant to the wider investment community,’ said Simon Elliott, head of investment company research.
In this regard, HOT’s decision to pay quarterly dividends this year – a relatively unusual feature in its AIC UK All Companies sector – and hike distributions for last year by 24% is a lever the board knows it must pull with all its might.
After a tough time for UK smaller companies funds, particularly those like HOT fishing in the junior AIM exchange, the trust delivered an underlying return of just 0.2% including dividends in the 12 months to 31 October. With investors underwhelmed, the trust’s shares generated a -3.7% total return ended the financial year nearly 20% below their net asset value (NAV).
The election of a Conservative government and the UK stock market rally of the past three months have fortunately revived performance – HOT shares are up 14% since October – and narrowed the discount to 17%.
But the gap is still wide and crucially, HOT knows that if it could eradicate the discount, its market value would leap from £85m to £102m, in theory putting it on the buy list of more wealth managers.
The risk for HOT is shareholders take matters into their own hands and narrow the discount by voting to wind down the trust and exit at close to NAV.
The lack of trust bargain hunters on the share register such as City of London Investment Management and 1607 Capital Partners suggests that danger is not high.
Nevertheless, HOT knows that performance under Henderson and co-manager Laura Foll has to improve if it is to win new investors and re-rate the shares. In the meantime, it is hoped a targeted 6.5p of dividends to be paid in June, September and December topped up with a final 7.5p payment in a year’s time will dissuade more investors from selling.
HOT’s 46.4% total shareholder return since 2015 – well below its sector average of 79% - underlines the challenge the value fund managers have had in the growth-biased bull market of the past five years.
Although last year they were tripped up the declines in conferencing software company LoopUp (LOOP) and automation software developer Blue Prism (PRSM) and Neil Woodford’s forced sale of 4D Pharma (DDDD), there were successes for the HOT duo, particularly from North Sea oil and gas explorer Serica Energy (SQZ) and specialist translator RWS Holdings (RWS).
‘The greatest opportunity lies in the smallest companies and AIM stocks, currently held back by liquidity concerns which have caused open-ended funds to consequently sell at low valuations but we expect a catch-up in performance in 2020,’ they said in their outlook statement.
The managers’ positive conclusion was that closed-end funds, such as HOT, ‘without the need to worry about liquidity, should be a beneficiary’.
But that depends on what kind of liquidity you are talking about. While it is true that trusts like HOT don’t need to fear buying illiquid small-cap stocks, Winterflood's survey and the trust's wide discount shows they should be very concerned about their own liquidity should investors regard them as sub-scale and not worth bothering about.