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Issuing New Equity

Closed-end funds and OEICs
chevin
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Issuing New Equity

#159167

Postby chevin » August 13th, 2018, 10:46 am

A bit of a beginner's question when it comes to ITs. One of the ITs I've held for a while (Baillie Gifford Shin Nippon, BGS) has been using the fact that it's been trading at a premium to carry out a series of issues of new equity. I can understand why this would be attractive to new investors, but am a bit concerned as to the impact both on share price and for me as a current holder. Am I correct in thinking that it can only suppress the share price? TBH, the whole issue of issuing new equity for an IT leaves and its impact on the investor leaves me a bit perplexed, and any explanation from one of the more knowledgeable on this board would be most gratefully received - I've not found anything sufficiently clear when googling (probably my inexpertise!). Thank you for any help.

Alaric
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Re: Issuing New Equity

#159172

Postby Alaric » August 13th, 2018, 11:01 am

chevin wrote: Am I correct in thinking that it can only suppress the share price?


A premium in an IT could arise because there's more demand than sellers. So issuing new shares should reduce or remove the premium. The new money would presumably be invested alongside the existing holdings, so shouldn't affect the net asset value per share.

Increasingly ITs are being run so that their market price performance more directly tracks the net asset value. That means buying in shares when there's a discount and issuing new ones when there's a premium. They compete more directly with ETFs and OEICs when they do this.

scrumpyjack
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Re: Issuing New Equity

#159174

Postby scrumpyjack » August 13th, 2018, 11:11 am

Baillie Gifford have frequently issued new shares at a premium with their Scottish Mortgage Investment Trust. It will slightly increase the net asset value and increase the size of the trust. Periodically they have then cut the management fee as the larger size of the trust enables a smaller percentage fee.

I think it is beneficial for existing holders if you take the long view, but obviously it may in the short term reduce the premium of the SP over NAV.

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Re: Issuing New Equity

#159180

Postby forrado » August 13th, 2018, 11:27 am

It may help the OP to think of ‘tap issues’ as they are known, as one of the discount-premium control tools that ITs have at their disposal. While buying back IT shares trading at a discount, for cancellation or to be held in treasury, is the more common practice, tap issues – or issue of equity if preferred – is the flipside of the coin. The intended purpose being to weaken the premium by, what could said to be, a series of mini-cash raising exercises. For example; City of London (CTY) has become practised masters at raising capital, over the years, by regular issuances of equity whenever the share price looks to be getting ahead of the NAV.

chevin
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Re: Issuing New Equity

#159322

Postby chevin » August 13th, 2018, 5:49 pm

That all makes eminent sense - thank you all. I can see how this would control the premium/discount. I'm stil not 100% sure why they want to do this (aside from the issue of costs as explained by scrumpyjack).

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Re: Issuing New Equity

#159327

Postby Alaric » August 13th, 2018, 5:56 pm

chevin wrote: I'm stil not 100% sure why they want to do this (aside from the issue of costs as explained by scrumpyjack).


They aren't alone in the market place, having both OIECs and ETFs as competitors. Comparisons to these other instruments are simpler if the noise of share price fluctuations doesn't shout out the investment performance. But it may just be fashion, so once one does it, others feel the need to follow suit. Having a mechanism for removing discounts helps get a new Trust off the ground. Why invest 100 when you expect that if you sell you will only get 80% of the value back? (That's if there's a 20% discount).

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Re: Issuing New Equity

#159356

Postby scrumpyjack » August 13th, 2018, 7:46 pm

and of course selling new shares results in an increase in the managers fee, which is a percentage of assets. More assets, bigger fee!

It is good that the managers of SMIT periodically reduce their fee percentage (they don't have to do so) and it is now only 0.37%

hiriskpaul
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Re: Issuing New Equity

#159384

Postby hiriskpaul » August 13th, 2018, 10:16 pm

chevin wrote:That all makes eminent sense - thank you all. I can see how this would control the premium/discount. I'm stil not 100% sure why they want to do this (aside from the issue of costs as explained by scrumpyjack).

The issuing of new shares at a premium would usually be expected to be beneficial to existing shareholders provided it is down with some care. To see why, consider an extreme example, albeit an unrealistic one. Assume an IT has 100m shares with net assets of £100m (£1 per share), but with a share price of £2. They then issue another 100m shares at £2, boosting the assets by £200m. There are now 200m shares with assets of £300m, or NAV of £1.50 per share. So by issuing the new shares at an inflated price, existing shareholders see a 50% boost to NAV. Essentially issuing shares at a premium will boost NAV per share. Whether that directly benefits existing shareholders really depends on how much this reduces the premium after issue. Generally though ITs are adept at doing this and the increase in NAV per share usually offsets any reduction in the premium.

The reverse process of buying/cancelling shares at a discount to NAV also boosts NAV and is somewhat safer for shareholders as it also tends to reduce the discount - a win win for shareholders.

As Scrumpyjack says, a big incentive for the managers is that issuing new shares increases assets under management and so increases management fees. Buying back shares at a discount, reduces AUM, but it boosts NAV which may lead to performance targets being met and the triggering of bonuses!

chevin
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Re: Issuing New Equity

#160689

Postby chevin » August 20th, 2018, 8:09 am

Been off-line for a couple of days, so apologies for belatedness, but once again thank you all - my understanding has definitely improved!


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