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Multi-management: Open and shut case

It was interesting to note the recent comments from some high-profile multi-managers that investment trusts are too troublesome to include within their portfolios.

Taking this attitude will leave them severely disadvantaged in the new world. Until recently, the manager of a fund which invested in other funds had to decide whether to focus exclusively on closed- or open-ended funds. This was a completely artificial distinction which was brought to a close with the introduction of the Ucits 3 legislation. Historically, closed-ended specialists produced the strongest performance but none were ever marketed effectively and thus remained dwarfed in size by the mainstream multi-managers.

Discount volatility and liquidity issues make life difficult but provide extra opportunities to add value for managers who understand capital structures and the factors that drive discounts and thus have the ability to trade within the secondary market. As one well-known mid-cap manager commented recently, investment trusts remain “the last bastion of inefficiency within the UK stockmarket”.

A reason why some managers dislike investment trusts is that they lack the skill sets required to exploit closed-ended funds. There are literally hundreds of teams used to analysing unit trusts and Oeics but only a handful with investment trust experience.

Investors are demanding more specialist products and eschewing closet tracking. The investment trust structure is well suited to management styles that involve concentrated portfolios or asset classes that are illiquid. The closed-ended nature of investment trusts protects the manager from the disruptions of short-term inflows or redemptions and allows for hedging, performance fees and higher yields to be incorporated in the mandate.

More than a dozen investment trusts have been launched in recent weeks including funds specialising in India, hedge funds, Asian income, retirement property, structured products, high-yield debt and corporate raiding. None of these could achieve their objectives if they were structured as open-ended funds. Three interesting examples are Morant Wright Japan income, Principle capital and the India growth fund.

Morant Wright’s trust has a five-year fixed life. It has sold its yen exposure for the duration and the interest rate differential it received on this trade allows it to pay a high yield. The managers prefer mid-caps and the closed-ended structure allows the team to employ greater conviction within the portfolio than they could with their original open-ended fund. Investors benefit from a higher yield, a stronger portfolio and having currency risk neutralised compared with owning the same managers’ Oeic.

Brian Myerson launched his Principle capital trust with the objective of applying private equity processes and disciplines to investing in publicly-quoted companies. In the past he has successfully extracted value from the likes of Aquascutum and Liberty. As his fund will own big positions in a small number of companies, it would be impossible to operate with the threat of redemptions.

The India capital growth trust was seeded by Caledonia and will invest in mid- and small-caps as well as unlisted companies. This is an attractive strategy given the overbought position in Indian blue chips. Investors have been attracted by this market’s strong fundamentals but are in practice restricted to buying the very biggest companies whose share prices already discount much of their future success. Meanwhile, many non-mainstream stocks can still be bought for less than 10 times this year’s earnings. Once again, it would be impossible to replicate this portfolio within an open-ended structure.


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