By Adam Lewis The Murray Japan Growth & Income investment trust is holding more in cash than in e...
By Adam Lewis
The Murray Japan Growth & Income investment trust is holding more in cash than in equities as it tries to avoid breaching its debt covenant.
The £61.3m portfolio run by Graeme Sinclair sold off £20m in Japanese equities by 12 March. As of 14 March the trust had just £7m, equivalent to 10.8% of the portfolio, in equities. In contrast it has some 33.3% in cash and money market instruments.
The trust, launched in November 1999, is obliged to ensure its assets are worth at least 160% of its £36m in yen-denominated bank debt, a figure of some £57.6m.
Volatile market conditions have prompted Sinclair to switch from equities to cash but he has also bought £1m in call options on the Nikkei 225 index.
He said this means investors continue to have exposure to equities and he retains the ability to buy back into actual companies at some point in the future. Sinclair estimates the options strategy is effectively giving shareholders £16m worth of exposure to the equity market.
Sinclair said: "The key is that with £1m in call options, with the effect of gearing, has given us the value of the Japanese stocks we sold, so exposure is as its always been, it is just held in part in call options.
"The attraction is, the most we could lose is the value of the call options. Investors will still receive dividend payments, we have simply taken action to protect ourselves against the worst-case scenario."
Sinclair said that the headline figure of 10.8% exposure to Japanese equities gave an incorrect impression of how far exposure to the Japanese had come down because the trust had always had around 50% of the portfolio in income-generating assets.
As at 14 March cash and Japan equities exposure made up 43.1% of the portfolio's assets. Derivatives made up around 1%, shares in other investment companies some 30.8% and fixed income some 24.6%. The fixed interest portion is mainly held in sterling denominated high-yielding corporate bonds.
Murray Japan Growth & Income is now run by Aberdeen. Last year Aberdeen's European Technology trust breached its covenant, leading to the trust having to repay £40m of bank debt. At launch the trust aimed to offer a net dividend yield of 8% which would be paid quarterly. As of March 20, it was trading at a discount of 7.6%, its 52 week share price high being 105.5p and its low at 49p.
The Nikkei 225, for the year to 23 March, has had a total return of -34.55%, compared with the FTSE All-Share which returned -14.01% over the same time. The 52 week low for the Nikkei was this month when on 15 March it hit 11433, its lowest for more than two years. Its 52-week high was on 5 October 2000, when it reached 16192.
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