The smart exit policies being introduced by investment trusts
The smart exit policies being introduced by investment trusts.
Investors in any collective investment vehicle part with their money in the hope and expectation of earning a decent return on that cash. Still, they also know there are no guarantees – the price of many assets can fall as well as rise, and some fund managers inevitably perform better than others.
But what if the fund could offer some form of insurance against underperformance? That’s what an increasing number of investment trusts are trying to achieve with performance-related tender offers.
Effectively, what these 40 or so investment trusts are offering is an insurance policy.
David Prosser
These offers are valuable because investment trust investors often face an additional challenge when they feel returns are disappointing – there is the potential for shares in the fund to trade at a discount to the value of the underlying assets.
That is simply a function of the structure of investment trusts, which issue a fixed number of shares to provide exposure to a portfolios of assets. But when a fund slips to a significant discount, it can be very frustrating for investors, preventing them realising the full value of their holdings in the fund if they want to take their money elsewhere.
Investment trust boards, which exist to safeguard the interests of shareholders, recognise this problem, and are taking action. In the event that returns come up short, a performance-related tender offer gives investors an opportunity to take some or all of their money at net asset value, or very close to it, sidestepping the discount at which their shares may trade.
The example of Utilico Emerging Markets, the latest investment trust to have announced plans to introduce a performance-related tender offer, shows how this can work. It is promising that if the performance of its underlying portfolio fails to beat the MSCI Emerging Markets Total Return Index over the next five years, it will buy in up to 25% of its shares at a price close to or at net asset value. That will give investors a more attractive escape route if, at that point, their shares are trading at a chunky discount.
New research from the investment trust analyst team at Winterflood reveals that 22 funds already offer a similar policy to Utilico Emerging Markets. There are plenty of variations on the theme, but all these funds have promised to buy investors’ shares at or close to full value if their returns aren’t up to scratch.
Winterflood also points out that an additional 20 investment trusts operate with a policy of running unconditional tender offers. These funds promise to offer to buy in shares at or close to net asset value on specific dates or after fixed periods, irrespective of how they’re performing.
Effectively, what these 40 or so investment trusts are offering is an insurance policy. They’re providing investors with the assurance that they’ll be able to secure good value on exits from the fund even if a discount threatens to get in the way. It’s a smart way to help investors get past some of the concerns they understandably have about discounts and the investment trust structure.
That said, it’s important to recognise these offers are not a guarantee of superior performance. They provide investors with a means to sell at a reasonable price relative to the value of the fund’s portfolio, but they make no promises about the portfolio value itself. That isn’t possible because future portfolio performance is inevitably uncertain.
Still, given that investment trust discounts have been problematically and persistently high over the past couple of years, these tender offers are very welcome. Insurance is meant to provide comfort and security, helping policyholders to overcome anxiety about a particular risk; that’s what this strategy can achieve.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
