Those wishing to tap into new investment trusts will have experienced disappointment in the past year. Not a single trust launched on the London Stock Exchange in 2022, the first year investors have witnessed such an absence since 1978, according to Winterflood. Fundraising has also fallen well short of the elevated levels of 2021, indicating pretty clearly just how cautious both investors and those looking to issue equity have become.
And yet with valuations recovering for the time being, some trusts are now on the hunt for cash. The mooted Conviction Life Sciences vehicle may have recently ditched its plans for an initial public offering (IPO), but the AT85 Global Mid-Market Infrastructure trust was still looking to raise £300mn. What’s more, some existing names have once again turned to the market, with BH Macro (BHMG) and 3i Infrastructure (3IN) both tapping investors up for cash. That’s arguably a good thing – such popular trusts should be able to attract investors to their placings, adding a bit of confidence to a battered part of the market.
This might be a cheap way in. Investec analysts have argued, for example, that 3i Infrastructure is raising equity off an “outdated” net asset value (NAV) calculation struck on 30 September 2022 and “completely ignores the passage of time between [then] and 3 February 2023, the date at which this equity placing was effectively priced”. They have made the case that such issuance would effectively go at a lower price than it should – an opportunity for new investors, but a problem for existing ones.
If the pricing is excessively cheap, it may at least seem welcome in an environment where share price discounts are abundant and many trust shares now struggle to command a premium valuation. Just a handful of UK-listed funds can now boast a share price premium to net asset value (NAV) and those cases are pretty specific. Think of the infrastructure and renewable energy infrastructure trusts that have maintained investor confidence but in many cases look cheaper than they did a year or so earlier, or defensive names such as BH Macro, Ruffer (RICA), Capital Gearing (CGT) or Personal Assets (PNL). Such trusts did especially well in 2022, and continue to look good if challenges persist.
A few of the other trusts that held up in 2022 have also recently commanded a share price premium to NAV: think a limited number of equity income trusts including City of London (CTY) or the slightly less conventional Law Debenture Corporation (LWDB), which generates additional returns through a professional services business. A few other winners of recent times also traded on premiums as of early February, be it country specialist Ashoka India Equity (AIE), BlackRock Energy and Resources Income (BERI), CQS New City High Yield (NCYF), or Baillie Gifford vehicle Pacific Horizon (PHI).
With premiums now looking so rare, they at least point to a few sectors that might serve as crowded trades, be they wealth preservation or renewable energy infrastructure. But trusts that command such premiums and want to issue equity may well face their own challenges given that markets have looked especially fragile and ‘bargains’ appear to be abundant. With so many trusts on discounts, those still on premiums will really have to earn any support.
