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
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
£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
Source: FE Analytics
|| 1yr (%)
|| 3yrs (%)
|| 5yrs (%)
|| 10yrs (%)
| Finsbury Growth & Income
| FTSE All Share
| IT UK Growth & Income
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
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.