Attack of the arbs: The trusts at risk from activists

Investment trust analysts have warned arbitrage activity will be rife in 2012 and could lead to a number of wind-ups in the sector this year.

Corporate activity has been steadily increasing in the closed-ended sector since 2008’s credit crisis.

Last year activists attacked a number of trusts, building up stakes in companies they perceived were delivering weak performance. In total, 30 companies were wound up.

Here investment trust analysts and MAM’s Nick Greenwood tell Investment Week which trusts could be under threat from arbitrageurs.

Fund of hedge funds

The fund of hedge funds sector is plagued with arbitrage activity, with the likes of Laxey Partners and Weiss taking advantage of the wide discounts up for grabs.

Numis analyst Ewan Lovett-Turner said the structure of trusts in the sector, where boards hold continuation votes every five years, is a key driver behind the arbitrage activity. He added trusts with an asset base of less than £50m and poor performance are at risk of extinction.

“The Goldman Sachs Dynamic trust has been sitting on a 28% discount for a number of years and activists have latched onto this. They now dominate the shareholder register, and last month the board announced the trust will be wound up as a result,” said Lovett-Turner.

He added Castle Asia Alternative’s future is also uncertain as the trust faces a continuation vote in June, with Weiss currently its biggest shareholder with a
26% stake.

“Other trusts under threat are Saltus European debt, of which Weiss owns 25.6%, and Laxey Partners has a 16.3% stake.  It is also under pressure ahead of its continuation vote later this year and is likely to wind-up because the performance has been poor.”

Winterflood analyst James Brown named Cazenove Absolute Equity as another trust under threat. “Weiss owns 18.5% of the share capital and a continuation vote has also been triggered by the discount widening to over 5% – so there is uncertainty over its future.”

3i Infrastructure

Nick Greenwood, manager of the £31m Miton Worldwide Growth Investment Trust, said 3i Group is also under pressure from Laxey Partners to distribute its 35% holding in  3i Infrastructure, its closed-ended fund.

“Laxey has been building up a stake and is looking to capitalise on the group’s poor share price performance over the last decade, with the activists campaigning for a special distribution to be paid out to shareholders.”

Alliance Trust

Alliance Trust may have successfully fended off calls from Laxey Partners to implement a discount control mechanism at its AGM last May, but the activists still remain on the shareholder register.

Brown said as Laxey has retained its 1.5% stake, further corporate action cannot be ruled out. “We understand Laxey Partners is still on the fund’s share register, as are Elliott Associates, an American arbitrageur.

“Further corporate action cannot be ruled out and we would not be surprised if the group were to receive another letter from Laxey during the course of the year.”