Investment Trust Shorting

[moorfield]

Hedge funds circle struggling UK investment trusts
https://www.ft.com/content/390c442c-01c ... 0e31389371

How concerned are long term income investors with well diversified PHYs by this sort of behaviour? Does it present opportunities to keep topping up, or should the hills be run for?

[londoninvestor]

If I'm reading the article right, the hedge funds aren't shorting ITs. On the contrary, they're acquiring stakes and pushing for various measures to return capital to investors.

You'd expect that to narrow discounts, though if the outcome is that some trusts end up being completely wound up and returning all their capital, that will be disappointing for investors who liked the trust as a long-term vehicle.

[scrumpyjack]

I'm very happy for the hedgies to buy IT shares and push management for actions to cut the discount. Previous actions from activist investors in this field have generally been very beneficial to investors. Alliance Trust was transformed after Catherine Garratt- Cox (Catherine the Great) was booted out. Since then the shares have performed extremely well.

[SalvorHardin]

If I'm reading the article right, the hedge funds aren't shorting ITs. On the contrary, they're acquiring stakes and pushing for various measures to return capital to investors.

You'd expect that to narrow discounts, though if the outcome is that some trusts end up being completely wound up and returning all their capital, that will be disappointing for investors who liked the trust as a long-term vehicle.

Yes, the article isn't about shorting. Instead it's about various problems that investment trusts have and how some hedge funds have started buying investment trust shares and are agitating for changes to reduce the discounts, by distributing capital to shareholders and possibly winding up the IT.

The article is more about other factors, notably reducing fees, mergers, the failures of new investment trust launches to raise sufficient capital, widening discounts and how the KIID rules are driving investors away from investment trusts and into higher charging funds. From the article (I don't subscribe to the FT, but you can often get access to an article behind a newspaper paywall if you search for its title in Google News).

"Some fund managers also blame regulatory changes for choking demand. In 2022, the way investment trusts’ fees were presented to some investors was changed, in response to new guidance on rules originally introduced in 2018. Critics argue that the UK’s interpretation of the rules — which also cover EU funds — means British trusts’ fees are artificially inflated.

Last month, a group representing 109 trusts wrote to chancellor Jeremy Hunt warning that the current set-up “cannot be allowed to continue”. It added that the rules were driving investors to EU-domiciled funds and exacerbating the poor performance of the UK stock market. A regulatory overhaul could unlock £7bn per year of lost investment to the UK at no cost to the taxpayer, it concluded."
"

[flyer61]

There is no doubt the IT share prices in many cases have gone crazily out of kilt with the underlying assets.

Take Lindsell Train Investment Trust LTI - A £200M IT where it is a small concentrated equity holding in what one would call 'quality' Companies.
However, it has 35% of it's assets in the Fund management business Lindsell Train Limited. About 24% of the business based on a total share issue of 26660. The 65% of assets are readily realisable so you could get back to cash quickly. That makes about £136M. The FM business has a £100M of cash in it. So £24M ultimately belongs to LTI. £136M plus £24M equals the market cap of the trust, £160M. So the FM business is thrown in for free if you buy shares at the present price. To me it's nuts! The FM business is not having a great time of it however it still has circa £15/16 Billion of assets under management. It is a very profitable business! What price for the FM business? Well City of London Investment Group CLIG has a market cap of £150M on £7.5B of assets. Double your 150 and you have £300M for £15B under management. 24% of that I make £72M.....I have pencilled in a dividend of £8M from LTL this year so I think my valuation share of the FM business is not to far off the mark.

I paid today £792 per share and so I believe the declared NAV for the trust is correct at about £1030.

Buying ULVR, Diageo, LSE, Relx on a 23% discount along with a FM business similarly discounted seems a no brainer to me.....some people might say leave the er off the brain and i'd be correct

I'll predict that we will look back at this period as a time to have loaded up on many ITs particularly where there is visibility to the underlying assets and those assets are liquid.