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ITs at a premium

Closed-end funds and OEICs
Adamski
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ITs at a premium

#353863

Postby Adamski » November 5th, 2020, 6:06 pm

Noticed BG China Growth now at 17.6% premium and Pacific HI at 15.6%.

Do you think these kind of premiums are short term or will last? Is it driven by recent popularity of investing in China / Pacific region? Will BG have to issue shares to get the premiums down, or leave it to the market? Is this an example of IT gearing increasing returns on way up, and magnifying on way down?

Adamski
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Re: ITs at a premium

#354034

Postby Adamski » November 6th, 2020, 10:28 am

Got no replies yesterday, but since spotted same issue discussed on Citywire, which I read but am not on. One poster suggested buying the oeic which is priced per the market, BG are active at managing premiums, so when premium narrows then but the IT equivalent. Think that's good advice, and highlighting an instance where buying the Oeic makes sense over an IT, a least in the short term.

scrumpyjack
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Re: ITs at a premium

#354039

Postby scrumpyjack » November 6th, 2020, 10:35 am

I know nothing of these trusts but there can be reasons why the published NAV may be misleading, for example if they have substantial unquoted investments that the market thinks are worth a lot more than their book value.

DavidM13
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Re: ITs at a premium

#354099

Postby DavidM13 » November 6th, 2020, 1:02 pm

scrumpyjack wrote:I know nothing of these trusts but there can be reasons why the published NAV may be misleading, for example if they have substantial unquoted investments that the market thinks are worth a lot more than their book value.


It is a fair question. However, Pacific Horizon = 1.1% unlisted, not sure about the other one.

I struggle to purchase on a premium, no matter how good they are, and would rather give my money to Woodford than pay 17%!

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Re: ITs at a premium

#354207

Postby 77ss » November 6th, 2020, 6:19 pm

DavidM13 wrote:
scrumpyjack wrote:I know nothing of these trusts but there can be reasons why the published NAV may be misleading, for example if they have substantial unquoted investments that the market thinks are worth a lot more than their book value.


It is a fair question. However, Pacific Horizon = 1.1% unlisted, not sure about the other one.

I struggle to purchase on a premium, no matter how good they are, and would rather give my money to Woodford than pay 17%!


I bought PHI just under a month ago, when the premium was about 7.5% (I don't have a problem with that size premium).

Share price up by 17% in less than a month, a lot of which will be down to the increasing premium. Obvious temptaton to cut and run at some stage.

I took a closer look at its major holdings. Nearly 10% in Sea Ltd. Interesting company. IT bubble territory or the next Asian behemoth? I suspect the market may be betting on the behemoth ending.

PHI has run out of share-issuance permission which probably increases the premium, however:

https://www.investegate.co.uk/pacific-h ... 01404314E/

Adamski
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Re: ITs at a premium

#354383

Postby Adamski » November 7th, 2020, 4:59 pm

@77ss, you may be better off selling PHI, buying the BG Pacific fund equivalent, then buying back in, once shares issued and closer to NAV.

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Re: ITs at a premium

#354654

Postby shetland » November 8th, 2020, 10:16 pm

I hold BGCG, which I only bought 2/3 weeks ago, and wanted to top up on Thursday last week but didn’t fancy the premium so I bought the fund. I am tempted to sell the trust and buy the fund tomorrow.

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Re: ITs at a premium

#354704

Postby msantiago » November 9th, 2020, 9:53 am

I've had both of these on my watchlist for some time but didn't like the premiums at 7-8% and certainly don't when they are approaching 20%! The BGCG share price is up a further 8% today. I suspect some bullish sentiment wrt to China given Biden is expected to pursue a less confrontational policy is part of the driver but I really struggle to see why an investor would be buying at these levels...

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Re: ITs at a premium

#354736

Postby Largsviking » November 9th, 2020, 11:20 am

Been reading the chat.....my humble views...

I got in @4.37 a few weeks ago I view current growth as froth..( premium expansion)..so lets see what its like in 2 years. I noted today there was someone buying a 100k wedge of BGCG ( two dollops )

I like Baillie Gifford....I think they do good work and I like what I see in my current stake in SMT. I have watching BGEU as well, but there is seems to be more tech in it than I would like. I’m wanting something more than yet another fund with tech.

I wanted something of China, I did not have that much exposure to an economy which is growing. Of course there are still Japan holdings in there.

Many have been slain on the mountain of trying to make sense of Chinese business process and culture....Anthony Bolton being one, this is not a live or die bet for me but the old adage one has to take some risks to accumulate, this is the vehicle I chose.

So far so good but these are not normal times.......LV

PS thanks to all who write on these boards.....I find it very useful and a goto source before I would ever buy anything....ever !!!!!!!!

Adamski
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Re: ITs at a premium

#355629

Postby Adamski » November 11th, 2020, 5:50 pm

BGCG down 7.6% today. Premium at 31.5%. Due to drop in China tech c4% (regulator threats been down today and yesterday). Plus issued equity 5pm today. Would expect continued downward fall on prices as BG issuing equity at increasing amounts. Guess they'll want premium down to reasonable levels. Re China tech pullback would have thought this is "noise" as China govt likes its industry to toe the line (like the pull back in Sep).

Dod101
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Re: ITs at a premium

#367079

Postby Dod101 » December 17th, 2020, 5:24 pm

As I said on another thread, BG has been issuing new equity almost on a daily basis since they took over. The new shares have been held in Treasury and they comprise the shares that they bought back by tender when the mandate changed and they are making a useful turn on them. Obviously issuing new shares dilutes existing shareholders but it is to me at least less of a concern with a growth trust than it would be with an income one. It is good to get the premium down a bit and hopefully it will stabilise in due course.

Dod

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Re: ITs at a premium

#367081

Postby Lootman » December 17th, 2020, 5:31 pm

Dod101 wrote:Obviously issuing new shares dilutes existing shareholders

Does it? If an IT issues shares at a premium to net asset value and sells them at the market price, doesn't that benefit existing shareholders? There are more shares at issue of course, and so your percentage ownership declines slightly. But the asset value is increased by the proceeds from the sale of those shares, so you have a smaller share of a bigger pot.

I can see the dilution if they sell at a discount to the market, but not otherwise. Although I admit I cannot quite get my head around all the possible permutations.

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Re: ITs at a premium

#367086

Postby Dod101 » December 17th, 2020, 5:48 pm

I agree and in this case, the IT is I think doing well from its issue of new shares. I think they acquired them at 90% of NAV at the tender offer and are issuing them at about 1% over NAV so they are benefiting everyone. My point about dilution though is that existing shareholders are seeing their share of the entire trust fall slightly(very slightly in most cases) but are unlikely to notice especially with a growth trust. If it is an income trust, the extra shares that are being issued can sometimes reduce the growth in the dividend because of more mouths to fee, although in the longer run, the additional assets should produce the additional income required, but an existing shareholder is definitely being diluted.

Just work it out on the back of an envelope, taking say a Trust with 100 shares in issue. If they issue 20% more shares and I own 10, then I start out owning 10% of the trust and end up owning 10 out of 120 rather than 10 out of 100, which reduces my ownership to 8.3%.

Dod

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Re: ITs at a premium

#367087

Postby scrumpyjack » December 17th, 2020, 5:55 pm

Generally trusts can only issue shares at a premium or buy back shares at a discount, both of which should benefit existing shareholders other things being equal. If they issue more shares, they will probably invest that cash in further shares of their existing holdings so there is no dilution.

In BG's case the increasing size of the investment trust, whether from issuing new shares or from increasing asset value, has enabled them to reduce charges, again to the benefit of shareholders.

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Re: ITs at a premium

#383457

Postby Adamski » February 3rd, 2021, 8:11 pm

BGCG premium down to 5.7%. Looks like BG issuing new equity over last 3 months has done the trick. I've got the Oeic version and thinking about switching over now. Owners of the trust version been on a rollercoaster ride!

Dod101
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Re: ITs at a premium

#383466

Postby Dod101 » February 3rd, 2021, 9:22 pm

scrumpyjack wrote:Generally trusts can only issue shares at a premium or buy back shares at a discount, both of which should benefit existing shareholders other things being equal. If they issue more shares, they will probably invest that cash in further shares of their existing holdings so there is no dilution.


Why would you say 'can only' in both of these cases? Maybe because that would be the terms of the authority they seek from shareholders?

They would surely not do it but I know of nothing otherwise to stop ITs buying back shares at a premium if they were foolish enough to do so. Likewise they could issue shares at less than NAV but that would be to no one's benefit except possibly the managers and of course the new shareholders.

I am not entirely convinced by your comment that there is no dilution. Clearly there is for the continuing shareholders because the shareholder will end up with a smaller share of the enterprise in terms of his/her percentage ownership of the share capital. The size of the enterprise , by which of course I mean the IT, will increase in that the assets will grow and if the deal is done at more or less par, the NAV per share will be more or less the same as before the share issue, but that is not what is generally meant by dilution, or not.

Dod

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Re: ITs at a premium

#383568

Postby scrumpyjack » February 4th, 2021, 9:50 am

Dod101 wrote:
scrumpyjack wrote:Generally trusts can only issue shares at a premium or buy back shares at a discount, both of which should benefit existing shareholders other things being equal. If they issue more shares, they will probably invest that cash in further shares of their existing holdings so there is no dilution.


Why would you say 'can only' in both of these cases? Maybe because that would be the terms of the authority they seek from shareholders?

They would surely not do it but I know of nothing otherwise to stop ITs buying back shares at a premium if they were foolish enough to do so. Likewise they could issue shares at less than NAV but that would be to no one's benefit except possibly the managers and of course the new shareholders.

I am not entirely convinced by your comment that there is no dilution. Clearly there is for the continuing shareholders because the shareholder will end up with a smaller share of the enterprise in terms of his/her percentage ownership of the share capital. The size of the enterprise , by which of course I mean the IT, will increase in that the assets will grow and if the deal is done at more or less par, the NAV per share will be more or less the same as before the share issue, but that is not what is generally meant by dilution, or not.

Dod


I said ‘generally can only’. I cannot recall a single instance in my decades of investing where an IT sold its shares at a discount (other than in an IPO) or bought them at a premium. The buyback authority will either be in the articles or in shareholder approved resolutions and as far as I can remember is always accompanied by a statement that the managers will only buy at a discount or issue at a premium. Legally of course, if so empowered by shareholders they could do the opposite but I can’t recall a case of that.

Most cases are buybacks at a discount and most are small, though in special circumstances they can be very large (eg where Alliance Trust bought back over 30% of their own shares).

As for ‘dilution’, I suppose I have always thought of dilution in the case of investment trusts as a dilution of NAV per share, but in the case of ‘normal’ companies I think like you of it as a percentage shareholding. An IT is different from other companies in that it does not have some particular and limited business with a ‘moat’. It only invests in other businesses and can generally increase or reduce its shareholding in those businesses as required.

The ‘business’ asset of an IT might be thought to be the skills of the managers, where they are outstanding as seems to be the case with BG, but the trust does not ‘own’ that asset. The BG managers are able to run other ITs at the same time, or start new ones, and they do.
In the end I think this is just semantics, but the important point IMO is that shareholders are not disadvantaged by their IT buying back at a discount or issuing more at a premium to NAV.

I was involved in a number of companies, generally family ones, where the directors took the question of dilution extremely seriously as they did not want the family interest watered down. One had an A and B share structure so the family shares had guaranteed voting control, another set up a long term employee share ownership scheme but structured so that the company bought shares on the market each year to cover the shares given to employees.

I just can’t see those concerns being relevant to an investment trust.

Dod101
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Re: ITs at a premium

#383573

Postby Dod101 » February 4th, 2021, 10:04 am

Thanks for your extensive comments and I agree with all you say. It is probably just semantics but I thought that your original comments might have given any 'newbie' the wrong impression. Your/our remarks have clarified that.

A and B shares, with different voting rights are nowadays rather frowned upon but are still relatively common with family controlled companies to enable the family to retain voting control without owning a majority of the shares. They are though largely absent in ITs.

Dod


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