Alliance Trust, the UK’s largest investment trust, should cut the discount at which its shares trade in the stockmarket, the head of one of its biggest rivals has said.
According to Andrew Bell, the chief executive of Witan Investment Trust, “It will help the sector if Alliance Trust bought back more shares and traded at a lower discount,” following pressure from Laxey Partners, Alliance Trust’ activist shareholder.
Like Alliance Trust, whose shares are worth £2.5 billion, Witan is a member of the FTSE 100 stockmarket index and of the Association of Investment Companies’ global growth sector. Its market capitalisation is £1.3 billion.
Laxey has urged Alliance Trust to adopt an automatic mechanism to control the discount at which its investment portfolio trades on the stockmarket. Witan and Foreign & Colonial, another FTSE 100 competitor, already have such mechanisms in place.
Alliance Trust’s discount was 13.8 per cent on May 6, according to Trustnet, compared with 10.8 per cent for Witan, which aims to keep its discount below 10%.
Bell acknowledges investment trusts will have to make a sustained effort to control their discounts to attract retail investors ahead of the new regulation in the sector.
The retail distribution review will ban firms, including fund managers, from giving financial advisers commission in exchange for distributing their products to retail investors. The review will come into force at the end of 2012.
Investment trusts could benefit from the regulation as currently few of them pay commission.
However, retail investors and their financial advisers currently have to do more research on investment trusts, as they are bought and sold at a discount or premium, compared with their open-ended competitors, which are not.
Bell says like-minded trusts could be viewed as a cartel if they agree on a common discount policy without new regulation.
However, he says a number of trusts already recognise the benefits of automatically controlling their discounts.
According to Bell, Witan would be prepared to sustain its discount further at a lower level than 10% if investors were enthusiastic about its performance and did not require a higher discount to invest.
Bell says trusts find it difficult to enforce unusually low discounts artificially as they become more vulnerable to speculative