As investment-trust discounts have blown out from negligible levels at the start of 2022 to 16% on average today, equity issuance – both by existing trusts and new launches – has vanished. Boards are responding with improved communications, marketing and share buybacks. But while buying back shares at a discount enhances net asset value (NAV) per share, it does not necessarily reduce the discount.
Some trusts are going further, pursuing a reorganisation, merger, or winding-up. Trusts managed by Abrdn have been particularly active in this area. Abrdn’s numerous acquisitions over the years have left the group with a wide variety of trusts of different styles and sizes. Many of them had a mediocre performance, leading to the impression that they’ve been neglected by the manager.
Three years ago, Perpetual Income & Growth, a former Invesco trust, merged with the Abrdn-managed Murray Income (LSE: MUT) to form a £1bn trust with lower costs and greater liquidity. The result has been disappointing so far, with a three-year return of 23%. The discount to NAV has been kept under control, standing at 5.6% today, and the yield is above 5%, but for those seeking UK equity income, there are better-performing alternatives.
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More interesting is its £1.8bn sister income trust, Murray International (LSE: MYI), which has returned 44% over three years, trades at a small discount to NAV and yields 3.7%. It has more than 40% of its assets in Asia ex-Japan and emerging markets, but only a little over 25% in North America.
This should have been a significant drag to performance in recent years, but stock selection has been good and the tide on geographic allocation should be turning in its favour. That said, long-standing manager Bruce Stout has just announced that he is retiring (see below).
Elsewhere, the sub-scale and underperforming £80m Abrdn Japan (LSE: AJIT) trust was trading at a 15% discount to NAV, but it’s now merging with the £160m Nippon Active Value (LSE: NAVF). A 25% cash exit for AJIT adds a sweetener to the deal.
NAVF is the top performer in the sector (up 44% over three years) and is trading close to NAV, so this is a perfect solution for AJIT holders. NAVF also agreed a merger with Atlantis Japan Growth (LSE: AJG) last week (see below).
The £40m Abrdn Latin American Income is being wound up, while Abrdn Diversified Income & Growth (LSE: ADIG), with £355m of assets, a five-year total return of just 13% and trading on a 26% discount, is reviewing its options. Abrdn Smaller Companies Income (LSE: ASCI), with £67m of assets, is merging with Shires Income (LSE: SHRS).
Finally, Abrdn’s two mainstream Asia trusts, New Dawn (LSE: ABD) and Asia Dragon (LSE: DGN), have recently announced a merger. Both have performed dismally and trade on discounts of over 10% to NAV. The combination will bring together £850m of assets. There is a cash option for up to 25% of New Dawn’s shares, but not for Dragon.
The combined trust will, like New Dawn, include Australasia in its investment remit. The historical performance of these trusts hardly inspires confidence, but holders should stick with the merged trust in the hope of better returns.
The revamp four years ago of Abrdn’s Asian Smaller Companies, now called Abrdn Asia Focus (LSE: AAS), with nearly £500m of assets, has resulted in a three-year return of 38%. That lags Fidelity Asian Values (LSE: FAS), with 59%, and Scottish Oriental Smaller Companies (LSE: SST), on 49%, but the five-year record is more competitive and a 14% discount to NAV is attractive.
The message is that Abrdn is getting to grips with the trusts it manages. This should result in improved performance. There are still some lame ducks on its list, but it is likely that the firm has plans to sort these out.
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+.
Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts; two directorships are still active.
After 39 years in financial services – including 30 as a professional fund manager – Max took semi-retirement in 2017.
Max has been a MoneyWeek columnist since 2016 writing about investment funds in magazine and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications.
See here for details of current investments held by Max.
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