MusingMarket wrote:SalvorHardin wrote:This is a great advertisment for investment trusts over open-ended funds. In similar circumstances the investment trust's share price would fall without the need for forced sales.
I'd add the proviso "This is a great advertisment for investment trusts without discount controls over open-ended funds".
Investment Trusts are allowed to buyback 14.99% of shares per annum without a further shareholder vote. Since Woodford' Equity Income went from a 10.9bn fund to 3.7bn fund prior to suspension of trading it would have had major problems as an Investment Company if it had discount controls. There are a fair number of fashionable investment trusts that stay pretty strictly to the share price being at par to NAV and these trusts are advertised as such. Retail holders of such investment trusts are not going to take too kindly to a sudden loss of confidence in a manager leading to a huge run on the trust leading to a discount being inevitable which adds impetus to the run on the trust.
"I didn't realise I couldn't redeem at 24 hours notice" or "I didn't realise a wide discount could develop" which is worse? I'd say it's splitting hairs for the short-term psyche of the investor, there'll be panic either way.
Discount control is permissible (since 1999), not mandatory. There is a wide divergence on whether to use it all. Although most boards like to have the power up their sleeves, often they do not exercise it. Annual reports are full of directors explaining why they have issued or bought in shares, or not as the case may be.
Those which do apply discount control regularly often do so only at the margin, to keep price and NAV aligned within a percentage point or two. The power to issue new shares without specific shareholder approval up to a pre-set limit is mainly to deal with surges of demand, e.g. for Scottish Mortgage in recent times. ITs almost never try to close a gaping discount by retiring a lot of issued capital absent a formal tender offer.
It is the same with gearing. Most mainstream trusts have gearing limits way above what they choose to borrow. They carry little or no net debt, and the nature of their business makes debt repayment easier than for most, since their assets are liquid and transparently valuable.
Structural debt is less common than formerly-- as are complex capital structures, e.g. warrants, convertible prefs-- and much of it, dating from the early 1980s, is now being funded with dramatic savings on the coupon thanks to Quantitative Easing. Tactical borrowing only is the norm, unless debt is back to back with portfolio holdings such as fixed interest.
Retail investors in ITs tend to be more knowledgeable, calm and loyal than their counterparts in unit trusts. In theory a large discount might suddenly emerge from a run on an equity-based investment trust because of a general alarum, but it is hard to think of such episodes.
Anyhow, the main point is that you can always sell, if reluctantly; whereas with an OEIC the decision is out of your hands pending the authorities' good pleasure.