There are a handful of investment trusts that consistently trade at a premium and that can take advantage by issuing new shares.
Investment trust discounts widened dramatically during the stock market crash and many of these funds are now having to buy back their own shares to keep the discount under control. For some however the sell-off was just a temporary blip and they have since regained their premium rating and been able to issue new shares to meet the demand.
A trust will only normally trade at a premium to the underlying net asset value (NAV) if its holdings are in high demand or if investors have confidence in the manager and believe that he will outperform. It can take advantage of this by issuing new shares valued between the NAV and the prevailing market price.
The reason for doing this is that it gives new investors the chance to buy the shares more cheaply than they could otherwise get them without diluting the existing shareholdings. Ideally the premium element should be enough to cover the associated fund raising costs with any remaining profit adding to the underlying NAV.
From the fund’s point of view the extra liquidity should squeeze the share price back towards its NAV and the new cash would give the manager fresh capital to invest. This is a great position to be in and an investment trust that is consistently able to tap the market like this would be unlikely to slip to a wide discount unless something unusual happened.
The main beneficiaries
According to data from Winterflood Securities, in the first four months of this year the investment trust sector was able to use regular share issuance to raise a total of £839m. The main beneficiaries and the amounts raised were: Smithson (LON:SSON) £77m, Impax Environmental Markets (LON:IEM) £73m, City of London (LON:CTY) £69m, Finsbury Growth & Income (LON:FGT) £56m and Worldwide Healthcare (LON:WWH) £43m.
Smithson raised £822.5m when it launched in October 2018 and this popular global smaller companies fund has since built up an excellent track record with the strong returns and regular new issuance taking its total assets to £1.6bn. There was a brief period at the height of the sell-off when its shares were available at a discount, but they have since recovered and normally trade at a small premium.
At £687m Impax is the UK’s largest listed environmental fund. The managers typically invest in technology-based systems or services in environmental markets such as alternative energy, water treatment and pollution control. They expect these areas to benefit as sustainability pressures grow and this has enabled the shares to consistently trade at a premium.
Yielding over 5.5%
City of London has increased its annual dividend every year for the last 53 years and the board has recently said that it will do so again this year even if it means using the revenue reserves. The £1.5bn investment trust typically trades at a premium, despite suffering a significant fall in value in 2020. It is currently yielding over 5.5% and was the fund-of-the-month in my recent article on the best funds to protect your income.
Nick Train’s Finsbury Growth & Income Trust has also had a difficult start to the year, although it has held up much better than the wider market. The manager invests in strong companies with low debt and loyal customers and thinks that this should enable them to survive the current challenges. FGT typically trades close to NAV.
The £2bn Worldwide Healthcare Trust provides a broad exposure to health and biotech and has recovered strongly since the sell-off with the shares providing a positive return year-to-date. It has shown real resilience along with the wider sector as I explained in a recent post.