Five top-performing trusts without the discount volatility

FE Trustnet looks at a selection of sector-leading trusts that use discount control mechanisms (DCMs), in order to reduce discount volatility.

By Joshua Ausden, News Editor
Monday July 30, 2012

One of the biggest problems retail investors have with closed-ended funds is their changeable discounts to net asset value (NAV). If an investor buys a trust on a premium and its discount suddenly widens due to poor performance or a change in management, losses are compounded to an even greater extent.

To counter this problem, some trusts use discount control mechanisms – or DCMs – which allow management to limit the changeability of a discount. If a trust’s discount widens due to a lack of demand, management can buy back shares. Similarly, if a trust’s discount is on a steep premium, management can issue new shares to bring this figure down.

Here are five highly rated trusts which have utilised DMCs effectively:

Personal Assets Trust

FE Alpha Manager Sebastian Lyon’s portfolio has a discount target of 0 per cent. While eliminating the discount entirely is nigh on impossible, Lyon has managed to maintain a discount consistently between the 2 and -2 per cent range, by diligently buying back shares and issuing new ones when the discount/premium gets too far away from the 0 per cent mark.

As well as controlling its discount effectively, the trust tops the risk-adjusted return tables in recent years. According to FE data, Lyon has returned 71.68 per cent since taking over the portfolio in March 2009. While the trust’s FTSE All Share benchmark and IT Global sector average have returned marginally more, they have done with significantly more volatility.

Performance of trust, index and sector since March 2009

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Source: FE Analytics

The trust has a total expense ratio (TER) of 1.15 per cent and is trading on a premium of 1.4 per cent.

Lyon also heads up the FE five-crown rated Trojan fund, which is closed to new investors.

Finsbury Growth & Income

Nick Train’s £229.3m portfolio is a favourite with retail investors, partly down to its success in keeping the discount down to a minimum.

Management deploys a discount target of 5 per cent, which it has kept to with ease in recent months due to the popularity of equity income portfolios. However, Winterflood says the team has been very effective in keeping within a small range in the longer term.

Performance of trust, index and sector

Name	1yr (%)	3yrs (%)	5yrs (%)	10yrs (%)
Finsbury Growth & Income	10.47	96.81	40.07	254.76
FTSE All Share	-0.44	38.53	9.37	112.66
IT UK Growth & Income	3.32	47.84	-5.43	108.78

Source: FE Analytics

The portfolio has returned 254.76 per cent over the last decade, making it the best performing UK equity income trust by some distance. It’s also a top quartile performer in its sector over one, three and five years.

Finsbury Growth & Income has a TER of 1 per cent, and a one year historic yield of 2.59 per cent. It’s currently on a premium of 0.5 per cent.

Troy Income & Growth

The trust comes from the same stable as Lyon’s Personal Assets Trust, and also targets a discount of 0 per cent. FE Alpha Manager Francis Brooke took over the trust in August 2009.

“As soon as we completed the takeover we made it clear that we wanted to use the same mechanisms to control the discount as seen on the Personal Assets Trust,” explained Brooke.

“The discount had gotten out very far before we joined, so this is a priority.”

In the months prior to Brooke’s appointment, the discount got out as far as 16 per cent; however, since joining, the discount to NAV has sat between -2 and 5 per cent. It’s currently on a premium of 3 per cent.

According to FE data, the portfolio has returned 61.99 per cent since August 2009 – more than twice as much as its FTSE All Share benchmark, with less volatility.

Troy Income & Growth has a TER of 1.25 per cent, and is currently yielding 3.62 per cent. It is much in the same mould as the Troy Income fund, with almost exactly the same top-10 holdings and weightings.

Foreign & Colonial IT

The £2.3bn trust – one of the oldest and largest in the entire AIC Investment Companies universe – aims to keep its discount to below 10 per cent.

“The manager [Jeremy Tigue] has been very good at keeping this discount down in recent years, in spite of the volatility caused by the financial crisis,” said Keiran Drake, analyst at Winterflood. “The trust’s discount is actually a little over that margin, but this is something of an exception.”

Tigue has managed the trust since January 1997. Since taking over the portfolio, he has returned 173.8 per cent. Foreign & Colonial has a TER of 0.5 per cent, and is yielding 2.33 per cent.

Aberdeen Asian Income

The top-performing Aberdeen Asian Income trust has turned heads since its launch in 2005. It’s second in the total returns table over five years, with returns of 132.72 per cent. Only Aberdeen Asian Smaller Companies has returned more.

Performance of trust, sector and index over 5yrs

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Source: FE Analytics

The trust is a top quartile performer over a one and three year period as well. Aberdeen targets a maximum discount of 5 per cent. In spite of a tough period for emerging markets in recent months, the trust is currently trading on a premium of 7.2 per cent.

It has a TER of 1.4 per cent, and a yield of 3.43 per cent.

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David Westraietgll 409725 Jul 30th, 2012 at 05:49 PM

Well said Ark. Quite right too. Theo ever the pessimist!!

Theo Jul 30th, 2012 at 03:29 PM

Please note it is misleading to give the TERs of ITs without mentioning their performance fees (PF). For example the Personal Assets trust has a TER of 1.15% (not mentioned in the TN fact sheet), and a PF of 0.50% - 0.75% making a total of up to 1.90%, which is more than the average UT. Partiality towards one's subject of writing is understandable, but should not be carried too far.

Those without experience of ITs should note that they also have unavoidable brokerage fees of 1 -2%, plus account fees of about £50 pa. Discounts exist because the market does not think that trust is worth its share price and any money going towards reducing the discount, is at the expense of dividends or reserves, not out of thin air.

Ark Welder Jul 30th, 2012 at 04:16 PM

1) Personal Assets does not operate a performance fee. You appear to be misunderstanding how the AMC is structured, which in any case does form part of the quoted TER and/or ongoing charges.

2) Brokerage fees can easily be avoided by using a broker that charges less than 1-2% on transactions and that does not have a £50 annual fee.

3) Share prices reflect what 'markets' think, and not what they do not think.

4) Reducing the discount can be made by selling assets that the fund holds, increasing the NAV in the process, and ...

5) ... when the IT does buy back shares at a discount, it can have the effect of increasing the dividend paid out to remaining shareholders because the remaining revenue is distributed between a reduced number of shares.