In an in-depth analysis carried out by our own Valeria Martinez this week, she highlighted just how bad the discounts have become, touching levels last seen during the 2008 global crisis.
It was just as bad back in the summer, when I found that 91% of investment trusts ended H1 on a discount.
There are varying factors driving this, but it is mainly the same macroeconomic headwinds of rising rates and inflation, which are also dragging down the lion’s share of equity markets.
Wait, the central banks did what was expected for once
Pre-pandemic, the chance to snag some of the top investment trusts at a discount was almost unheard of.
Even now, many experts rate the current setting as a chance to get in while it’s cheap.
I even pointed out as much in one of my summer briefings.
But as Matthew Read, a senior analyst at QuotedData, wrote for us, discounts and premiums reflect the balance between supply and demand for an investment company’s shares and can be driven by a range of factors.
So, everything being on a discount doesn’t help investors discern what is actually a good deal, and which trusts are being poorly rated to reflect bad performance or management, or both.
Hipgnosis continuation votes don’t lie (feat. Wyclef Jean)
Read explained that discounts “are not good for shareholders as they will not be able to realise as much value from their investments should they wish to sell”.
Boards and managers have several options to help levy this, including gearing, but with the cost of debt staying high, there is a risk trade-off to this too, which we’ve seen go terribly wrong when managers have had to offload assets to cover liabilities.
Share buybacks are another option, and some have argued that trusts not utilising any of these tools are doing their investors a disservice, as they’re failing to exploit the options available to them.
The discounts have led to a surge in activist investor dealings, as shareholders have grown increasingly tired of reading that ‘we know things are bad, but this is what you signed up for’ in the reports.
While that might be a fair enough statement to some degree if you’re in a high growth trust right now, clients can employ the tools at their disposal in the same way managers can.
How do you solve a problem like a liquidity mismatch?
At the same time, many trusts are either merging or winding up because demand for products that are constantly boasting a little yellow sticker has shrunk. Meanwhile, company execs are looking at the increased costs of keeping these vehicles open and anything not making money is looking at a short remaining lifespan.
It all stacks to the conclusion that the investment trust space is facing its latest watershed moment.
Throughout this stream of consciousness, I’m struggling to recall the last time I saw a new trust being launched in the big-dog global or equity income spaces. And I don’t think this will change anytime soon.
Given all of the above, why would anyone take that leap?
To compete against legacy portfolios which have incredibly loyal client bases, so much so that they’re still buying into them and remaining invested when the discount is the highest it’s been in a decade, how is a new trust going to compete?
Going super niche also isn’t working out.
The IT Royalties sector only had two trusts at its peak, one of which was launched before the sector even existed, and both operated on a very similar formula.
A recession is (very probably) coming
Now, Round Hill Music Royalty has been taken private and the pioneer Hipgnosis Songs has lost its continuation vote.
I’ll give founder Merck Mercuriadis the credit that when Hipgnosis first launched I was intrigued. It wasn’t something many of us had seen before and there was a certain ‘cool’ element of owning some part of a historic discography.
Now, five years on, the trust is a shadow of that initial hype, and we have no idea what form it will take now that shareholders have done away with the chair and two directors.
So in the same way I don’t see a new global or UK-focused trust opening, I don’t anticipate much coming into these alternative spaces, especially on the super niche end, such as Leasing or Infrastructure Securities, for the same reasons.
The established ones are already in there, and unless someone figures out a way to reinvent the wheel, they won’t be much of a rival right now.
To be clear, I am not saying that I don’t want to see innovation or new products come through, even in the main sectors. I’m just saying I don’t think we will be seeing much of anything new for a while.
Right now, trusts are just trying to claw their way back to a neutral level in the best way they can and, frankly, trying to do the best for clients is the only thing that really matters at present.
We’ll be counting the time passing in years before we see the next big thing.
This article was first published as part of the Friday Briefing series, which is available exclusively to IW members each week. Sign up here to receive the Friday Briefing to your inbox each week.
