More than two thirds of investment companies (excluding VCTs) now have discount control mechanisms (DCMs) in place, compared to about 40% five years ago, but some industry commentators believe further action should be taken as no trust should be "sitting on a discount of 10% for more than a year".
Future outlook
This has been seen most recently from Jupiter Asset Management, which announced it would incorporate an annual redemption policy on its new Emerging & Frontier Income trust in order to assist with discount control.
Nick Greenwood, manager of the £63m Miton Global Opportunities fund, approves of this type of strategy, having introduced a redemption policy on his own trust in September 2015 among other changes, which have seen the discount narrow from a 12-month average of 6.7% to 0.3%.
Every three years the trust will offer investors the chance to realise their holdings at NAV, a route the board chose to take rather than having a hard DCM.
Greenwood said: "Redemption policies on fixed dates give shareholders a road map to cash, which means a trust is unlikely to ever languish on a discount.
"In our case, shareholders with a medium view know in 16 months' time there is an option to redeem which brings in more demand," he said.
"Investors need to know their money is not locked into an evergreen structure. It is a sensible evolution."
However, the manager is more sceptical of other forms of DCMs such as zero discount policies.
"There are plenty of situations where these do make a certain amount of sense but if you have one, you may as well be an open-ended fund. It is not acceptable to sit on a perennial discount but it is normal to be wide at difficult inflection points.
"In some cases, a value investor might come in and be a catalyst for change. There is a law of natural selection on trusts."
Dwyer agrees zero discount policies are not appropriate for every trust but said they must be used more often.
He added: "The industry needs to embrace these types of policies. The idea would work much better if more funds gave it a go."
Meanwhile, Simon Elliott, head of investment trust research at Winterflood, said "the effectiveness of discount control mechanisms is inevitably tested in more difficult market conditions".
He added: "While it is not possible for every investment trust to have a stringent discount control mechanism (often due to the illiquidity of the underlying portfolio), we believe that trusts should strive to ensure shareholders are not disadvantaged by discount volatility."
