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Weak investor sentiment, higher interest rate hikes and heightened macroeconomic headwinds have sounded the deathknell at a spate of trusts and Winterflood Securities has identified another 14 that could be next on the chopping block.

It comes after the difficult market environment claimed its latest victim in the form of Momentum Multi-Asset Value Trust (MAVT ). Its board announced yesterday that it would liquidate the investment company, giving shareholders the option to roll their cash into another of its vehicles or exit at close to net asset value (NAV).

In keeping up with its strict discount control mechanism (DCM), which ‘ensures the lack of any material’ gap between the share price and NAV, the trust has fallen in size to £43m and has therefore seen its ongoing charges ratio increase. The board has suspended its DCM with immediate effect.

This year, a number of boards have implemented corporate action. Schroders Capital Global Innovation Trust (INOV ) reviewed its investment strategy and RM Infrastructure Income (RMII ) launched a strategic review after the board rejected a bid approach last month.

Harder steps were taken more recently by abrdn Japan (AJIT ), a much smaller and worse-performing trust than its peer group, which merged with Nippon Active Value Fund (NAVF ). Earlier this week, CT Property Trust (CTPT ) announced an all-share offer by LondonMetric to acquire the trust.

Smaller investment trusts are more likely to face corporate action because they may be considered ‘sub-scale’, which can mean they are too small or their shareholder register is too concentrated, Winterflood analyst Elliott Hardy said. 

Of the 12 funds that have recently announced corporate action, US Solar Fund (USF ) and VPC Specialty Lending Investments (VSL ) were the only two that were over £200m.

At the time of announcement, ten of the trusts exhibited either current discounts wider than their five-year average or had five-year average discounts that were wider than their peer group, he said.

In addition, ten of the trusts’ NAVs had underperformed their peer group or their benchmark in the five-year period prior to the announcement.

Who’s next?

Winterflood has identified 14 investment trusts that meet the criteria: sub-£200m market cap, five-year underperformance of either the peer group or benchmark and an average discount below peers over a five-year period.

Equity funds

Fund	Ticker	Size (£m)	Discount (%)	5-yr NAV TR (%)
Atlantis Japan Growth	AJG	67	16.4	-12.6
Barings Emerging EMEA Opps	BEMO	60	18.3	-12.9
BlackRock Income & Growth	BRIG	40	9.6	17
Downing Strategic Micro-Cap	DSM	32	14.8	-10.4
JPM Mid Cap	JMF	191	14.6	-9.2
Jupiter Green Investment Trust	JGC	44	16.7	30.3
Keystone Positive Change	KPC	129	16.5	-27.3
Marwyn Value Investors	MVI	53	44	-5.3
R&M UK Micro Cap	RMMC	51	17.2	-12.9

Source: Morningstar, Refinitiv, Winterflood Securities as at 25 May 2023

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Small and micro-cap funds are typically smaller in size to enable the manager to develop meaningful positions without becoming a majority shareholder. However, in the event that a trust materially underperforms its peers or benchmark or has a persistently wide discount, the small size may become detrimental, Hardy said.

Alternatives

Fund	Ticker	Size (£m)	Discount (%)	5-yr NAV TR (%)
Triple Point Energy Transition	TENT	65	34.5	13.8
Premier Miton Global Renewables	PMGR	26	14.9	54.8
Ecofin US Renewables Infra	RNEW	86	17.2	5.8
LMS Capital	LMS	20	57.6	-16.2
Ceiba Investments	CBA	50	58	-27.8

Source: Morningstar, Winterflood Securities as at 25 May 2023

TENT makes the list given its substantially wide discount, which
has been wider than its Renewable Energy Infrastructure peer group on average since its launch in October 2020. A slow deployment of IPO proceeds led to an amendment to its investment policy in August 2022, which broadened its investment scope.

The fund announced on 3 April this year that it was fully committed, albeit at a much later date than initially targeted at launch. The fund has been derated (-5.1%) relative to its peer group (+10.8%) since inception and recent policy changes have made a limited dent on its persistently wide discount, which currently sits at 34.5%, Hardy said.

Although its NAV total return since inception (+13.8%) has been higher than that of the peer group (+10.1%), its small market capitalisation is likely to
compound the wide discount and hence make it difficult for the fund to achieve sufficient scale moving forwards.

Hardy stressed that the list was by no means definitive and that he does not have a crystal ball.

‘In applying a simple methodology, a number of trusts that may be considered to be “sub-scale”, and hence potentially be subject to future corporate action,
emerge. That is not to say, however, that all these funds necessarily should see corporate action, nor does it rule out such trusts offering an attractive entry point should market sentiment reverse,’ he said.