Adding to the size of the cake
David Prosser on whether share issues could be a cause for optimism.
When is a closed-ended fund not closed-ended after all? It’s a question that investment trust shareholders haven’t had to think about for a while; but with a number of funds issuing new shares in recent months, it’s worth reminding ourselves that being closed-ended doesn’t mean the number of shares is fixed forever.
The basics of investment trusts are simple. Each trust issues a fixed number of shares which then trade on the stock market. Buying the shares gives you exposure to the fund’s portfolio of assets, but the share price varies according to demand and supply; since there are a fixed number of shares available, pricing can get out of sync with the value of the underlying assets.
The contrast is with open-ended funds, which have a variable number of shares or units in issue. When investors want to buy into these funds, the manager simply issues more units. When they want to sell, their units are cancelled.
Both approaches have pros and cons, but the point here is that investment trusts sometimes stray into open-ended funds’ territory. When demand for their shares is particularly high, they may issue more of them. This not only satisfies that demand but also brings in new money for the trust, which may then be able to take advantage of additional investment opportunities.
“Investment trusts sometimes stray into open-ended funds’ territory. When demand for their shares is particularly high, they may issue more of them.”
David Prosser
All of which brings us to nine investment trusts that have done exactly this in recent months, with substantial numbers of new shares issued at JPMorgan Global Growth & Income, Ashoka India Equity, Invesco Bond Income Plus, Rockwood Strategic, Odyssean Investment Trust, Merchants Trust and CQS New City High Yield Fund. In addition, Chelverton UK Dividend Trust and CG Global Managed Portfolio Growth have run smaller issuances.
The first thing to say is that these share issues are notable. Much of the conversation in the investment trust sector over the past year has been depressing, focusing on funds where demand has lagged to such an extent that the share price has slipped to wider and wider discounts to the value of the underlying assets. In such a challenging market, new share issues have been few and far between.
To justify a new issue, an investment trust’s shares usually need to be trading at a premium. New investors are looking to buy at a price below the prevailing market price, or they would simply buy the existing shares. But existing shareholders want to see shares sold for slightly more than the value of the underlying assets, so that new investors are covering the costs of the issue (and not getting in on the cheap). Striking this balance is only possible when the trust is trading at a premium.
In that sense, the fact these funds have been able to launch successful share issues tells you that investors’ confidence in them is high. Each of the nine funds offers a different proposition, but in every case, investors are particularly enthusiastic about what’s on offer.
In total, these trusts have raised close to £250m of new money since the beginning of the year. By historic standards, that’s no great shakes, but when you consider that share issuance in the investment trust sector slumped by almost 80% last year, it’s an encouraging beginning to 2024.
Is this a turning point for the broader investment trust sector? Not necessarily, particularly given that discounts, on average, have actually widened over the first few months of the year. Still, this is welcome news for these trusts and shows there are good reasons to be positive about areas of the market.
