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Discount value draws Unicorn towards trusts

Unicorn Asset Management sees the investment trust sector as attractive because discounts to net asset value provide a “self-regulating mechanism” that open-ended funds do not have.

The company, which manages the Mastertrust fund of investment trusts, says investors are alerted to any problems within an investment trust by widening discounts.

When an underperforming investment trust has persistently wide discounts, corporate activity will deal with this. This may be a share buyback, where the trust buys back its own shares and cancels them to narrow the discount. Other options include restructuring the trust, a tender offer or a continuation vote. Under a tender offer, the trust buys back its own shares but this differs from a share buyback in that costs may taken into account in the tender offer price. This protects shareholders from higher costs from fixed costs spread over fewer shares. A continuation vote may result in an investment trust being wound up.

Unicorn says that, in contrast, underperforming unit trusts are allowed to limp on indefinitely. The firm also points out that investment trusts may have hidden value through a stake in an unlisted investment or a subsidiary.

For example, Unicorn holds the BlackRock world mining trust, which invests in unlisted company Glencore. Glencore is expected to list in the summer, which could lead to an increase in the NAV of the BlackRock trust.

Unicorn is holding the BlackRock trust mainly to play the theme of emerging market growth through areas like mining and commodities. The trust is also trading on an attractive discount.

Unicorn fund manager Peter Walls says: “We do not want to hold generalist emerging market funds. These are flavour of the month and it makes me wary, it suggests people are getting overexcited. We do not think emerging market equities look attractive at the moment. Brics and emerging market econ-omies will deliver GDP growth but that does not go hand in hand with equity markets. We think the BlackRock fund and City Natural Resources invest in areas that will benefit the most from emerging market growth.”

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