Tough year for trusts sees record buybacks and rush of board action

Deep discounts and difficult conditions prompted a raft of corporate action from investment companies, including buybacks, liquidations, mergers and manager changes.

Deep discounts sparked record investment company buybacks this year, but plenty fell foul of tough markets, with wind-ups and mergers grabbing headlines.

A review of 2023 by the Association of Investment Companies (AIC) highlighted a challenging year for trusts, which have struggled across the board with heavy discounts and lack of confidence among shareholders.

The average investment company has shouldered a double-digit discount for the entire year, the first time it has happened since the global financial crisis. The average discount started the year at 11.7% before hitting a post-2008 trough of 16.9% at the end of October, then recovering to 11.1%.

The lowly valuations of the shares have prompted boards into a record number of buybacks, with £3.57bn of shares repurchased in the year, versus £2.7bn in 2022, marking an increase of nearly a third, according to the AIC.

Boards weren’t just using spare cash to snap up shares, however, as they upped dividends, which totalled £6.32bn in the first 11 months of the year, versus £5.55bn for the same period last year. The boost in income made up for some of the capital losses suffered by investors, as industry assets were valued at £260bn at the end of November, down from £265bn at the beginning of the year.

The average investment company generated a share price total return of 5.1% in the year to 8 December, with private equity being the best performing sector, delivering a staggering performance of 48.7%, followed by technology and technology innovation, which was up 38.8%, riding a wave of artificial intelligence hype and hopes for an end to aggressive monetary policy. North America was up 16.6% while India and India subcontinent gained 15.5%.

Richard Stone, chief executive of the AIC, said discounts were ‘historically wide this year and that had increased the attraction of share buybacks’.

‘Towards the end of the year we have seen discounts narrow as investors begin to believe that interest rates have peaked and coule be heading downwards in the not too distant future,’ he said.

Corporate manoeuvres

The downward pressure on assets has knocked some trusts more than others, with a large number of boards forced to look at the viability of their funds, and many have been found wanting.

There was a plethora of corporate action over the year, with four mergers, mainly in the Asia sector, eight liquidations, and eight manager changes.

Of the mergers, Abrdn trusts have been party to three of them as the asset manager launched a number of portfolio reviews. Nippon Active Value (NAVF ), the £310m Japanese smaller companies trust, absorbed two other portfolios - Atlantis Japan Growth and Abrdn Japan.

Asia Dragon (DGN ), the £568m Abrdn managed Asia Pacific equity portfolio, subsumed stablemate Abrdn New Dawn, while Abrdn-run Shires Income (SHRS ) agreed the takeover of Abrdn Smaller Companies, of which it was the largest shareholder.

The merger trend is carrying on into 2024, with four already announced: Henderson High Income (HHI ) with Henderson Diversified Income (HDIV ), JPMorgan Mid Cap (JMF ) with JPMorgan UK Smaller Companies (JMI ), Troy Income & Growth (TIGT ) with STS Global Income & Growth (STS ), and Abrdn China (ACIC ) with Fidelity China Special Situations (FCSS ).

Along with mergers eight trusts wound up over the year as shareholders lost faith in their ability to deliver a return.

The funds that failed:

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2023 Investment company
Feb Blue Planet
Mar SME Credit Realisation
Jun Abrdn Latin American Income
Aug Axiom European Financial Debt
Aug Secured Income
Aug Momentum Multi Asset Value
Nov Highbridge Tactical Credit
Nov Chelverton Growth

All change

Another eight investment trusts are no doubt hoping for outperformance in 2024 under a new manager.

MIGO Opportunities (MIGO ) also appointed Asset Value Investors (AVI) as its new manager four months after serving notice on Premier Miton, bringing the total number of manager changes to nine. However, veteran investment trust bargain hunter Nick Greenwood will follow MIGO to AVI and continue to manage the £75m portfolio.

Nine manager changes is the most in a calendar year since 2009, according to the AIC. 

Manager changes:

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2023 Investment company New manager Old manager
Jan Majedie (MAJE ) Marylebone Partners Majedie
May Home Reit (HOME ) AEW UK Alvarium Investments
Jun Ceiba Investments (CBA ) Self-managed Abrdn
Jul Investment Company (INV ) Chelverton Asset Management Fiske
Oct Mid Wynd International (MWY ) Lazard Asset Management Artemis
Nov Asian Energy Impact (AEIP ) Octopus Energy Generation ThomasLloyd Global
Nov US Solar Fund (USF ) Amber Infrastructure Group New Energy Solar Management
Nov International Biotechnology (IBT ) Schroders SV Health Managers
Dec MIGO Opportunities (MIGO ) Asset Value Investors Premier Miton

Other boards tried to keep investors onside with reduced cost and during the year 26 investment companies amended fees to the benefit of shareholders.

The most common alteration was a reduction in the company’s base fee – with 11 companies making the change, another 10 companies reduced their tiered fees, and seven introduced tiered fees for the first time. Another two companies removed their performance fees.

Opportunities for investors

Given the tough market conditions it is unsurprising that there were few initial public offerings (IPOs) this year, with just two trusts venturing onto the market: Ashoka WhiteOak Emerging Markets (AWEM ), raising £30.5m, and AIM-listed Onward Opportunities (ONWD ), a UK smaller companies trust launched by Dowgate Wealth, which was founded in 2020 by former employees of Hargreaves Hale, and raised £12.8m.

Secondary fundraisings – which are undertaken by existing investment companies – garnered £1,1bn of interest, down from £5.2bn last year. 

The hedge fund sector raised the bulk of the cash at £315m, with a bumper funding from BH Macro (BHMG ) making up the entire sum and lifting the assets in the Brevan Howard-run fund by a quarter.

It was followed by UK equity income at £175m and global equity income at £162m. JPMorgan Global Growth & Income (JGGI ) raised £153m followed by £106m raised by City of London (CTY ).

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