Last year was eventful for closed-end funds as the requirements of different types of investor were ...
Last year was eventful for closed-end funds as the requirements of different types of investor were highlighted by the level of new issuance in the high-yield fund sector and the attacks of corporate raiders in the more conventionally structured funds.
The investment trust and closed-end fund universe can be split into three sub-categories, high-yield funds including split capital trusts, emerging markets funds, which include vehicles providing exposure to developing markets and specialist industry or theme sectors, and developed market funds, which can be classified as generalists for convenience.
Arbitrage investors are seeking to capitalise on the period of reorganisation and consolidation that is expected within the emerging markets sub-sector. Funds launched in the mid '90s were often introduced with a continuation or wind-up resolution that would be put to shareholders at the annual general meeting on the fifth anniversary of the fund. These resolutions provide a focus for initiating shareholder actions.
Latin American and global emerging funds have already been targeted, with Scudder Latin American Trust, Beta Global Emerging Markets and Edinburgh Inca returning assets to shareholders.
A failed attempt to wind up Govett Emerging Markets in May 2000 led the Board of directors to review the company's future and set a timetable for the return of assets to shareholders. The Board has subsequently announced reconstruction proposals that will allow shareholders to dispose of their shares for cash or roll their investment into a Guernsey domiciled company investing in Asian (ex-Japan) and Pacific securities and split capital investment trusts and other closed-end funds and bonds.
It is now well documented that traditional institutional investors no longer have a specific investment requirement for generalist vehicles and are generally regarded as net sellers.
Generalists do still present a suitable investment vehicle for retail investors, but the process of moving the shareholder base from the institutions into the hands of retail investors is a slow one. The its campaign is attempting to generate interest in the sector, but investor re-education to the benefits of the closed-end funds sector is not likely to have a significant impact in the short term.
Share buyback schemes have helped to absorb some of this potential stock overhang, but some institutional investors feel that buyback powers have not been utilised effectively to date. Arbitrage investors have used this transitional period as an opportunity to invest in potentially vulnerable funds.
Company Law in the UK provides shareholders with the right to introduce resolutions at a company's annual general meeting if they own at least 5% of the company's issued share capital or are able to speak for at least 100 shareholders.
An investor owning at least 10% of the company's issued share capital is able to requisition an extraordinary general meeting at which resolutions can be introduced. These methods are part of the arbitrage investor's armoury in seeking to realise fund investments at levels close to net asset value.
In December, arbitrage investor ST Partners LP requisitioned Bankers Investment Trust, Foreign & Colonial Investment Trust, Murray International Trust, and Scottish Investment Trust to put forward proposals for tender offers for up to 70% of issued share capital at forthcoming annual general meetings.
These actions were regarded at the time as somewhat opportunistic as the actual meetings would not be held until well into 2001, but it was clear that such proposals could not be ignored out of hand.
In each case, the trust company called upon its buyback powers to buy back ST Partners' holdings along with that of a handful of other investors at a discount to net asset value, which was narrower than the prevailing discount in the market. While these buybacks were still transacted at a discount that would provide an uplift to the company's net asset value, there were concerns that the buybacks did not provide all shareholders with the opportunity to dispose of their shares at such an attractive level.
Some institutional investors believe that Boards of the trust companies had simply given in to greenmail attacks and that the arbitrage investors would be back if discounts were to widen again. In an attempt to alleviate these fears, some investment trust Boards intend to use buyback powers more aggressively and thus help to unwind institutional positions.
While generalists appear to have been on the rack, high yield funds have gone through something of a transformation over the last 18 months as the composition of a typical high yield portfolio has changed dramatically.
Barbell-style portfolios have been introduced, which provide exposure to two separate and distinct portfolios within one investment product: a growth portfolio investing in assets that are intended to provide capital return, and an income portfolio typically investing in corporate bonds or high-yielding shares of other split capital trusts and closed-end funds.
The flow of reconstructions and new issues in the high yield sector in 2000 was particularly impressive as the sector raised approximately £4.7bn in new monies. This flow of new money does not appear to show any signs of slowing as new issues are still well received and some existing high-yield funds are approaching their wind-up dates and are offering shareholders new investment vehicles into which they can roll their existing investment.
The high yield barbell style portfolio is also now being offered to shareholders of more conventionally structured investment trusts as part of a reconstruction scheme.
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