Alliance Trust and Witan Deal Will be The First of Many

Closed-ended
investment
companies
can
represent
an
attractive
investment
vehicle
for
investors.
They
comprise
long-term
capital,
meaning
that,
in
theory,
they
do
not
face
the
same
liquidity
constraints
as
their
open-ended
peers.
This
permits
a
broader
investment
universe
and
some
more
specialist
investment
strategies.

In
addition,
trusts
can
gear
up
which
can
accentuate
returns
(and
losses).
Despite
this,
many
have
proven
unpopular
in
recent
years.
Discounts
to
NAV
have
generally
widened.

Why
Investment
Trust
Discounts
Won’t
Disappear

Indeed,
the
number
of
investment
trusts
trading
at
a
discount
has
increased,
and
they
have
been
impacted
by
a
number
of
unwelcome
developments.

Of
the
207
investment
trusts
over
£100m
on
Morningstar
Direct,
just
seven
traded
at
a
premium
to
NAV
at
end
May
2024,
including
the
giant
closed-end
investment
company
3i
(III).
The
average
discount
among
this
group
was
a
whopping
-13.8%
to
NAV.
This
makes
for
poor
reading
in
the
industry.

Discounts
to
NAV
have
long
been
studied
by
academics,
who
dub
this
the
“closed-end
fund
puzzle.”
It
is
well
known
that
closed-end
funds
typically
trade
a
discount
to
the
sum
of
their
holdings.
The
efficient
pricing
of
their
shares
is
impacted
by
liquidity
and
sentiment
towards
a
strategy
(i.e.
expectations
of
future
performance),
but
some
argue
the
market
fully
discounts
the
impact
of
fund
costs,
which
they
say
are
fully
baked
into
the
price.
Indeed,
costs
are
paid
from
by
from
NAV.

This
latter
point
is
important.
Under

“PRIIPS”
fee
disclosure
rules,
representative
fee
figures
include
the
cost
of
debt
and
other
operational
costs,
and
treat
all
investment
trusts
the
same
way
as
the
hedge
fund
industry.
More
fee
transparency
is
a
good
thing,
but
critics
of
the
regulation
say
that
these
costs
were
already
reflected
in
discounts
to
NAV:
costs
are
being
double-counted.

That
is
open
to
debate.
Still,
the
claim
will
become
more
germane
as
the
costs
of
gearing
may
be
expected
to
go
up
as
trusts
roll
over
their
debentures
and
other
forms
of
debt
at
higher
interest
rates.

The
General
Election
Has
Stymied
Progress

What
is
more,
such
fixed
costs
are
accentuated
when
funds
become
smaller.
As
a
result,
scale
has
arguably
become
more
important.
Additionally,
some
investment
advisers
have
strict
limits
on
the
size
of
trusts
they
invest
in
(typically
£100m
minimum)
and
also
on
total
ownership
levels.
This
further
accentuates
the
benefits
of
scale.
A
trust
that
gets
smaller
can
in
effect
lead
to
selling
pressure,
widening
discounts,
creating
an
unvirtuous
cycle
of
sorts.

I
am
aware
of
discussions
between
the
Association
of
Investment
Companies
and
the
Financial
Conduct
Authority
on
this
front.
However,
a
bill
to
“fix”
the
perceived
fee
disclosure
problem
proposed
by
Baroness
Ros
Altmann
and
Baroness
Sharon
Bowles
earlier
this
year
will
take
time
to
be
discussed,
and
progress
here
has
been
stymied
by
the
general
election.

This
will
likely
be
a
story
that
unfolds
over
years
rather
than
months,
and
I
expect
we
may
well
see
further
consolidation
in
this
area,
despite
the
many
advantages
the
investment
trust
structure
provides.

Daniel
Haydon
is
a
manager
research
analyst
at
Morningstar

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