Buoyant markets help narrowing discounts

Discounts in the investment trust sector are at their narrowest since 1996, according to Alan Brierley, research analyst at Dresdner Kleinwort Wasserstein. Discounts (conventional trusts only) narrowed from 15% to 8% from March 2003 to the end of June 2005.

Brierley attributes this narrowing to several factors. He says buoyant equity markets, strong relative performances, buybacks and corporate action have been the key drivers. “A number of the perennial underachieving trusts from the sector have been altered via corporate action. These have been replaced by property and funds of hedge funds, which are trading on healthy premiums. The net result of this has put upward pressure on discounts across the sector.”

Ongoing share buybacks and, more recently, treasury shares and discount control mechanisms have also helped control discount volatility, he adds.

As revealed in Fund Strategy (July 25) the Invesco English & International trust last week proposed to change its corporate structure to facilitate quarterly redemptions. This followed on from the Gartmore Growth Opportunities trust adopting a similar structure in May.

Brierley says: “At the beginning of the year we wrote that the sector must regain credibility following the split-capital debacle, and re-establish itself as a core savings product for the retail investor. In the first half of 2005 the sector has delivered healthy absolute and relative returns and over the past three years more than 70% of investment trusts have outperformed their relative benchmarks.”

As a result, Brierley says, he is reasonably confident on the outlook for the sector and he adds that he can see further demand for funds of hedge funds and property trusts.

Last week Schroders announced it has raised 150m for the Schroder Oriental Income trust. The launch, which is one of the largest in recent years according to Brierley, is yet more good news for the sector. He says: “Investment trusts continue to evolve and the money raised by Schroders just goes to show the problems created by splits are in the past. This is hardly a dead sector.”

The Schroders trust, managed by Matthew Dobbs, commenced trading on July 28 after receiving total applications for 163.5m.