UK investment trusts: Boaz may constrict value gaps

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It is much nicer getting a discount on a new sofa you are buying than on a UK investment trust you already own. Value gaps between the assets of these closed-end funds and their quoted shares are a recurring problem.

They attract activists, most recently Wall Street’s Boaz Weinstein. Saba, his hedge fund, has been buying exposures to UK trusts. This has prompted speculation of an activist campaign.

Saba has amassed holdings across UK closed-end funds, including stakes in BlackRock Smaller Companies, JPMorgan European Discovery, Schroder UK Mid Cap and more. A 6 per cent exposure to Henderson Opportunities Trust is Saba’s largest.

Since stock markets crashed in 2021, investors have shunned growth plays in favour of value investments. Discounts among trusts holding listed equities have moved into the mid-teens. These value gaps are commonest during crises.

UK closed-end investment funds, which hold on to assets even as their shares climb and fall in value, have raised just £1.7bn over the past year. That compares with an annual average of £9.4bn per annum in the previous five years, notes Alan Brierley of Investec.

Rapid jumps in bond yields are playing havoc with valuations. Discounts are largest for funds targeting illiquid assets. They stand at around one-third for private equity trusts and around half for venture capital funds. Cynics suspect net asset values should be much lower than stated.

Either way, share buybacks can shrink discounts. When these are substantial, funds are essentially getting their own stock picks or investments at below market or estimated prices.

The catch for managers is that fees tied to overall net asset values are often lower as a result. The conflict is policed with patchy results by supposedly independent boards.

The nuclear option for activists to engineer a complete winding up of a heavily discounted investment trust. US activist Edward Bramson succeeded in this at UK private equity trust Electra from 2016 to 2019.

Investment trust managers will remember this and shudder as Saba ups its exposure to their shares.