This week’s focus is on annual redemption opportunities. I made it clear earlier this month, when discussing the demise of Gulf Investment Fund (GIF ) – which just announced another year of benchmark-beating returns – that I strongly disagreed with the 100% exit opportunities it had been offering shareholders on a six-monthly basis. So, you can probably guess where this is going.

The biotech and healthcare sector is one that suffers from fairly extreme swings in sentiment. There was something of a bubble in biotech back in 2020, as the fight against Covid highlighted some of the incredible advances being made in medicine. However, as interest rates started to rise, cash-burning, unprofitable companies, with unproven technology sold off sharply.

Now, the listed biotech sector is recovering once again. Biotech Growth Trust (BIOG ) has been one of my fastest-rising holdings over the past 12 months (up 42% in net asset value (NAV) terms, and 38% in share price terms, according to Morningstar). However, Syncona (SYNC) – which has more of a bias to unlisted companies, and which I also hold – continues to disappoint and languishes on a near-43% discount.

The more diversified healthcare funds have been less volatile, but again there is considerable disparity between these three trusts. The team behind Polar Capital Global Healthcare (PCGH ) has done an incredible job of navigating the turmoil of the past few years. A 10-year chart shows a fairly steadily rising NAV and share price and its 10-year numbers now match those of another of my holdings, Worldwide Healthcare (WWH ), which has had a rougher ride.

Living year to year

The third of these trusts is Bellevue Healthcare (BBH ). It was launched in December 2016 and, for most of its life, traded at a premium, which has allowed it to issue a fair few shares. That changed in 2022 in the wake of the biotech selloff and a deterioration in the trust’s relative returns.

BBH has offered an annual redemption opportunity since launch. In 2022, redemption notices were submitted in respect of 30.6 million shares. In 2023, that figure was 77.4 million shares, and this year the figure is 163.8 million shares (about £262m). That adds up to the trust shrinking by about 47% from its peak.

Even now, Bellevue Healthcare is a reasonable size – about £422m market cap once the redemptions have been taken into account – but a similar-sized rush for the exit in 2025 would trigger questions about whether it should continue. Hopefully, as editor Gavin Lumsden recently argued, better days are ahead.

I am not a fan of annual 100% redemption opportunities. They can turn trusts into cash machines to be used as a source of liquidity in times of trouble, and they make it harder for managers to take a long-term view. Bellevue Healthcare’s track record suggests that they are not even a good way of keeping discounts narrow: its discount has widened over the past couple of months and is now close to 10%.

Polar Capital Global Healthcare offers, to my mind, a much more sensible alternative. Share buybacks help improve liquidity in its shares but redemption opportunities are more widely spaced. The trust was launched in 2010 with a fixed seven-year life. In 2017, shareholders were given the chance to tender their shares and new investors were brought into the trust. With the original investment thesis largely played out, the manager refined the investment approach to suit prevailing market conditions.

Shareholders will be given the opportunity to vote on liquidating the £489m trust in 2025, but I am expecting that the board will pre-empt this with another liquidity opportunity. Given its track record, I would expect that investors will be happy to back it once more, it may even expand.

Spacing 100% redemption opportunities this way seems a better use of the closed-end structure to me.

Which brings me onto AVI Japan Opportunity (AJOT ), a trust that I am a big fan of, and one that has been the best-performing of all Japanese trusts over the past year in NAV terms (up 31%).

Its approach is a long-term one. It can take time (sometimes years) to bring the management of the companies that it invests in around to its way of thinking, but the rewards are worth the wait. It is also skewed towards small-cap stocks and has been deliberately going down the market-cap scale so that it can have more bang for its buck.

When the trust was established in 2018, the prospectus said that the board could use its discretion to offer shareholders a full or partial exit opportunity in 2022 and every two years thereafter. These were designed to allow investors an exit if the original investment thesis did not generate the expected returns, or if circumstances had changed to make Japan unattractive.

The board has just decided to offer these redemption opportunities annually. I think, for the reasons outlined above, this runs the risk of a forced shrinkage of the company if one of these coincides with a period of market turmoil, for example, and potentially the associated forced selling of underlying positions in thin markets (although the creation of a redemption pool – as Bellevue has done, would alleviate this problem somewhat), while simultaneously reducing the trust’s ability to influence portfolio companies to the detriment of returns for ongoing investors.

The AVI Japan board is keen to see the trust expand (as am I) and thinks annual redemption opportunities will make that easier. As a compromise, perhaps it could, as the prospectus permits, limit the size of these.

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