Endowment Policy investment trusts will receive between a 5-10% NAV uplift if Standard Life is demut...
Endowment Policy investment trusts will receive between a 5-10% NAV uplift if Standard Life is demutualised, Merill Lynch estimates.
The market reacted to the news of a vote on Standard Life's mutual status by buying shares in investment trusts with exposure to the Scottish insurer's products.
On 26 April, the discounts narrowed on Barclays Global Investors (BGI) and Dresdner RCM's range of endowment policy trusts, totalling £229m in market cap with each having around a 20% portfolio exposure to the insurer's policies.
BGI Endowment Fund II's share price rose by 6.5p narrowing the discount from 11.2% to 5.8%. Meanwhile the share price of the £58.7m Dresdner RCM Endowment Policy Trust 2003 rose by 9.5p resulting in the discount narrowing from 6.4% to 1.9%. The share price of the £27.1m Dresdner's 2010 trust only rose by 2.75p with the discount moving from 10.1% to 7.8%. Merrill Lynch said the difference between the price movement was due to the life of the trusts. The market regarded the impact of the demutualisation as being greater on the shorter dated trust. Dresdner's Endowment Policy trusts can be regarded as similar to zero dividend preference shares in that shareholders receive no annual income but a fixed amount when the trust is wound up.
Endowment policy trusts provide forecasts of rates of return investors can expect based on current levels of life office bonuses. The 2003 trust currently forecasts a gross redemption yield (GRY) of 8.3%pa assuming bonuses remain unchanged until 2003. The GRY is a notional annual growth rate rolled up to provide a final return. The 2010 trust forecasts a GRY of 10%pa, again assuming bonuses remain unchanged, this assumption on a longer term view is regarded as relatively more risky as bonuses are more likely to fluctuate over a 10 year time span.
Both trusts' GRYs will increase by 3% if Standard Life is demutualised, according to estimates from Merrill Lynch. BGI's trusts are slightly different in that they pay shareholders equal amounts during the last five years of each vehicle's life.
Charles Cade, investment trust analyst at Merrill Lynch, said that of all the demutualisations Standard Life's would have the biggest impact on endowment policy trusts. The acquisition of Scottish Widows by Lloyds TSB provided an NAV uplift for the trusts of between 1-2%. Cade said the rumoured demutualisations of Friends Provident and Scottish Provident would have a similar impact. Dresdner's trusts are currently fully invested but do have exposure to Friends Provident and Scottish Provident, according to Simon White, head of investment trusts at Dresdner. He added that for the time being the trusts were not looking to increase their exposure to either group.
The boards of BGI's three trusts are providing support, including undisclosed financial backing, to the Standard Life demutualisation campaign headed by Fred Woollard. The three boards believe by supporting the campaign they are acting in the best interests of their shareholders.
Dresdner's trusts have yet to publicly come out on either side nor has the board of Life Office Opportunities Trust (LOOT), managed by Scottish Value, which has a 27% weighting in Standard Life policies. However, both, like BGI, have met with Woollard and Standard Life. Ned Cazalet, a life assurance analyst, believes the demutualisation of Standard Life is inevitable. He said: "If BGI believes it is in the best interest of shareholders of its trusts for Standard Life to demutualise, it must follow that it is in the interests of individual policyholders for demutualisation to take place."
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