Neuberger Berman trust to use redemption trigger

The largest investment trust to enter the market this year, the $507m Neuberger Berman Global Floating Rate Income fund, has implemented a redemption trigger that will buy back shares at close to net asset value if the company moves onto a wide discount.

The trust will allow shareholders to redeem up to 50% of their stake at the preceding day’s NAV, less a 1% administration cost, if the trust trades on a 5% discount for any three-month rolling period over the last three months of the year from December 2012.

Damian Holland, head of product development for the trust, said the mechanism would ensure shareholders do not lose money.

“We feel it makes sense to put in place a redemption trigger as it gives investors an easy way out if the trust drifts out onto a discount, which would result in them losing money,” said Holland.

“We do not want to penalise our investors and if they are not satisfied with the performance this will offer them a way out meaning investors can exit without entering the secondary market.”

The trust has deployed 90% of its asset base since launch in April, with manager Stephen Casey tilting the portfolio to a 60% overweight position in B-rated senior secured bank loans, as yields are currently 6%-7% compared to BBB, yielding 4.5%-5%.

Casey has also invested 19% in bonds, close to its maximum 20% allocation, in the view high yield will remain in a sweet spot until 2013 as he does not expect defaults to increase.

“We have allocated 16% to secured bonds – we do not see high yield hitting a wall anytime soon as there are no major catalysts to suggest default rates will rise. I believe the loans default rate will also continue to fall and rates will be below 1% for the next two to three years,” Casey said.

“In a volatile market there is a tendency for a flight into higher quality, but we will still have our overweight position in B-rated bonds as the space has too much cash on its balance sheets for default rates to rise.”

The trust’s sterling shares are trading on a 4.8% premium and three months from launch it has generated a 6% gross yield.