Discounts on equity income investment trusts have narrowed, with some even trading at a premium as demand from income-seeking investors grows.
At the start of 2009 closed-ended equity income vehicles were typically trading at discounts to net asset value (NAV) of 4% or 5%, says Williams Hemmings, the head of closed-ended funds at Aberdeen. However, many investment trusts are now close to NAV and some are trading on premiums, leading several to issue new shares to meet demand.
“Discounts are starting to tighten,” Hemmings says. “Sectors that ballooned very wide, such as property, funds of funds and private equity are still wide, although real estate has narrowed to a degree. Those narrowing are predominantly income funds – the demand for income is reflected in the demand for their shares.”
According to research by Wins Investment Trusts, regular issuance in February totalled £4.5m, of which £2.6m was from Murray International, an equity income investment trust run by Aberdeen. “Some funds continue to see decent demand for regular issuance, such as Murray International, and there may be a modest pick-up in demand for some higher yielding funds as we come to the end of the Isa season,” the report says.
Hemmings adds: “Since April 25 last year we have issued a total of 4m shares on Murray International, raising £25m, which represents 5% of the fund.”
However, Nick Greenwood, iimia Wealth Management’s chief investment officer, warns that the trend of narrowing discounts could lead to heavy share price falls: “Lots of trusts have been trading on premiums recently. The market mechanism has broken down so it can’t cope with trade. There isn’t the capital behind market makers as there was historically and this has left pricing dysfunctional.”