Trust shares in long-term prosperity

The JP Morgan Indian investment trust\'s share price rocketed more than 286% over five years as the country\'s GDP soared - so short-term dips in performance do not worry the managers.

Despite slumps in emerging markets the board of the JP Morgan (JPM) Indian investment trust has announced plans to open the fund to new investors, via a placing and offer. It will also give existing shareholders a bonus issue of subscription shares at no cost.

Since the turn of the year to October 7, the Bombay Sensex 30 index fell 41.9%, as the Indian stockmarket and emerging markets in general fell sharply. However, according to the board of the £280m trust, demand for the fund remains strong.

For existing shareholders the trust, which was launched in 1994, will issue subscription shares on the basis of one subscription share for every five ordinary shares. It will also open the trust up to new shareholders through a placing and offer for new ordinary shares, with subscription shares attached.

Similar to warrants, subscription shares are listed investment instruments with a financial value, which can be converted into ordinary shares or sold on the market for cash. However, unlike warrants subscription shares qualify as investments into stocks and shares Isas, but unlike ordinary shares, subscription shares are not entitled to receive any dividends from the trust.

Each subscription share gives the right to shareholders to subscribe for one ordinary share during a period lasting from January 2, 2009, to January 14, 2014.

If the shares are not exercised during this period, and provided the ordinary shares are trading above the conversion price of the subscription share, shareholders will receive cash on expiry. If the ordinary shares are trading at a price below the conversion price, the subscription shares will be worthless.

David Barron, the head of investment trusts at JPM, says the shares provide a geared exposure to the trust’s potential growth.

He says the board says it is beneficial to increase the number of ordinary shares in issue, so as to take advantage of long-term investment opportunities in India.

James Brown, investment trust analyst at Wins Investment Trusts, says issuing subscription shares is a good way of raising capital, but it will only prove to be fruitful if the net asset value (NAV) rises to about its conversion price, which will be set on October 29.

“However if the Indian market continues to fall they won’t exercise them and capital won’t be raised,” he says.

He adds that despite boasting an impressive long-term record, he is a little surprised JPM is conducting an offer for new shares. In addition to market conditions being tough, he says the offer for new shares will only be attractive if the trust is trading at a premium.

“Historically this has been the case,” says Brown. “However, over the past six months this has been more volatile, with it swinging from a premium to an 8% discount and back again.”

The trust is run by three managers: Edward Pulling, Rukhshad Shroff and Rajendra Nair. As at October 8, the trust was trading on a 1.9% discount.

Given India’s strong GDP growth, it is no surprise that performance over three and five years has been strong. The trust’s share price has risen 66.1% and 286.7% respectively, while the NAV is up 75.1% and 249.5%, according to JPM.

However, short-term performance has been less impressive, with the trust’s share price down 2.3% over the past year, and down 10.2% over the past three months. Over the same period its benchmark – the MSCI India index – fell 1.5% and 8.1% respectively.

Despite its long-term track record, Peter Walls, who recently took over the management of the Unicorn Mastertrust – a fund of investment trusts – says he is avoiding exposure to emerging markets. Walls – who runs Mastertrust on an outsourced basis for his newly-established firm Collective Investors – says despite good long-term performance, India, like most emerging markets, has hit new lows in terms of stockmarket performance.

Indeed, over one week to October 7, the Sensex fell 9.9%. As such, instead of investing in single country funds, he prefers the large generalist trusts and the more traditional income funds.

Brown is of the same opinion. Despite rating the management team of the JPM Indian trust, he argues that single country funds do not offer much diversification so he does not tend to recommend them.

Despite India’s falls, the managers of the trust remain
positive on the country’s longterm outlook.

This is because they say the economy is facing nothing more than cyclical headwinds and will continue to grow at about 7% over the medium-term, with earnings close to 15%.

However, with the sharp fall in the market, they say while valuations are reasonable, they are not necessarily compelling. An extraordinary meeting to approve these proposals will be held on October 30.