"Capitalizing on the rebound of affordable investment trusts: A guide"
UK Investment Trusts Face Shake-up Amid Activist Pressure and Market Volatility
The UK investment trust sector is currently undergoing a period of change, with various factors influencing its dynamics. Activist investors, such as Saba Capital Management, are increasing pressure on trust boards to consider structural changes, including converting trusts to open-ended funds to facilitate redemptions at Net Asset Value (NAV).
Despite resistance from most boards, this activism has contributed to record share buybacks of approximately £7.5 billion in 2024, indicating efforts to support share prices amid challenges. However, advisor platforms reported a 28% drop in trust purchases during 2023, reflecting cautious investor sentiment.
In the infrastructure and renewable energy sector, the typical discount on an infrastructure trust is about 14 per cent, rising to about 25 per cent for trusts that back renewable energy projects. For example, the Migo Opportunities trust is focusing on the renewable energy sector, where the next wave of activism is expected.
On the equity income side, certain UK-focused trusts continue to perform well. The Temple Bar Trust has delivered a 22.4% share price rise over 12 months and 72.4% over three years by emphasizing value investing mainly in UK equities. The City of London trust has also seen rising popularity, with a 50+ year record of increasing dividends and a current yield around 4.6%, attracting income-focused investors.
In May, the FTSE 100 real estate investment trust (Reit) LondonMetric paid £699m for the FTSE 350 'mega-shed' specialist Reit Urban Logistics, which was an 11% premium on Urban Logistics' price back in April, valuing the trust at a 5% discount to its NAV.
The continued existence of more investment trusts is in question, with directors seeking mergers or replacing managers of certain trusts due to the presence of arguably too many UK equity income trusts. Emma Bird, head of investment trust research at trader Winterflood Securities, states that mergers will produce larger and more liquid trusts, presenting a more compelling long-term proposition.
If you have been dismayed by the performance of trusts you hold, it makes sense to sit tight and hope that the shake-up gives a lift. Boards of investment trusts are taking tough decisions to shrink discounts, exploring mergers, or ordering reviews of their trusts' futures. For example, the Law Debenture trust has taken stakes in Greencoat UK Wind, where the discount is 19 per cent, and HICL Infrastructure, which is at a discount of 20 per cent.
If you want to take advantage of disruption by activists, follow this guide. Ben Yearsley of Fairview Investing is a fan of Foresight Solar (discount 18 per cent) and Greencoat Renewables (24 per cent). Darius McDermott, boss at funds ratings agency Fundcalibre, states that the sector was on its knees, with no buyers and only sellers, and discounts and yields at record highs. However, he also suggests that sentiment has started to recover, and the best opportunities lie ahead.
In summary, UK investment trusts face pressure from activist investors and subdued investor appetite amid macroeconomic headwinds. Yet, trusts with strong fundamentals and income records remain favored by investors. Record buybacks and discount narrowing signal some stabilization, while the secondary market developments in private equity trusts suggest future potential for more efficient pricing and liquidity. Investors are advised to differentiate between deeply discounted yet fundamentally sound trusts and those suffering from performance and governance issues.
Investors can capitalize on the activism in the UK investment trust sector by focusing on trusts with strong fundamentals, such as the Temple Bar Trust and the City of London trust, which have delivered impressive returns and attractive dividends. The continued efforts of activist investors, like Saba Capital Management, to convert trusts to open-ended funds could further impact the finance landscape of personal-finance portfolios in the future.
