US Smaller Companies run by North American mutual funds group Wellington is to convert into an Oeic ...
US Smaller Companies run by North American mutual funds group Wellington is to convert into an Oeic after its unsuccessful attempt to reduce its discount volatility.
The £101m trust has been one of the most active in the buyback market, cancelling 30% of its shares in issue and buying virtually all of its warrants. It was also the first trust to buy back its shares during a closed period. However, its discount continued to drift out past 15% levels. As at close of business on 8 May it was trading on a discount to NAV of 16.4%. In July 1999 the trust set a target of maintaining a discount of 10%. Its proactive share repurchasing activity meant that sometimes the discount did narrow to within the 10% mark.
Lesley Sherratt, chairman of the trust, said: "We have done all we can to sustain a narrow discount and it hasn't worked. The board had two options either to change the business model or change the manager. Speaking to shareholders they did not want to see a change in the management of the trust."
Under the reconstruction scheme shareholders will be given the opportunity to roll over into a Dublin based Oeic or accept a cash exit at NAV. Sherratt said the portfolio will be run in the same way and Wellington has said it will keep within a 1% Total Expense Ratio cap. Sherratt said: "This is important because one of the advantages of investment trusts is their low costs and we didn't want our shareholders to be disadvantaged by rolling over into an open ended vehicle."
Wellington runs the portfolio with a value bias. In the past year the trust has underperformed with the market concentrating on technology stocks. Over the longer it has not been one of the worst performing trusts by a long way, according to Alan Ray, an investment trust analyst at Credit Lyonnais. Since it was launched in 1991 the NAV has increased by 294%, in sterling terms.
Many other trusts are in similar positions to US Smaller Companies, trading on wide discounts but performing relatively well. Smaller Companies trust, managed by Aberdeen Asset Management, has outperformed its benchmark the FTSE Small cap index over five, three and one year time periods. Even so, the shares are still trading at a discount to NAV of 27.2%, well above the average discount for the UK smaller companies sector of 20.4%.
Ray expects to see more corporate activity among investment trusts. He said: "Many trusts are trading on wide discounts and for some, share buybacks are not working. So we may see reconstructions into Oeics or split capital structures and there may be some takeover activity between trusts."
In November 1999 Beacon investment trust announced it was converting into an Oeic. The trust, which invests in AIM stocks, was one of the top performing smaller companies investment trust in NAV terms but this was not reflected in its share price with it trading on a discount to NAV of 25%.