Monthly Review: Liquidity concerns for sector overstated
This month’s Winterflood Monthly review looks that old issue of size, does it really matter? Also recent new investment trust launches/share issues, and it considers sectors overall health.
The investment trust sector continues to enjoy a renaissance with tight discounts and high issuance levels. However, concerns still exist over the liquidity of trusts in what is referred to as the secondary market, that is demand for listed shares. A market capitalisation of £100m is often quoted as being the minimum size for a fund to be considered by private client brokers and wealth managers. However, the sector’s constituents have seen considerable growth in their market capitalisations over the last twelve months. 189 investment companies now meet this criterion, while 97 have market caps higher than £250m. While the majority of funds with market capitalisations of less than £20m are already in the process of being wound-down, there are still a handful of these funds that are managed on an ongoing basis.
In terms of liquidity, size clearly makes a difference as reflected by bid/offer spreads (the difference between buying and selling a share) in the secondary market. The top 25% of investment trusts by market capitalisation have a median spread of only 0.4%, while the comparable figure for the bottom quarter is a fat 2.6%. Ouch!
The average daily volume of shares traded for the top quartile by size was approximately £1m. The importance of what is usually referred to as liquidity is, illiquid shares put off large investors such as the institutions because they fear not being able to sell the shares when they want to, because of lack of demand or lack of illiquidity.
In the year to the end of August, 30 funds had average daily traded volumes of more than £1m, including 3i Group, HICL Infrastructure, Templeton Emerging Markets*, Alliance Trust and BlackRock World Mining*. There were a further 36 funds with average daily volumes of more than £0.5m, including funds such as Electra Private Equity, Personal Assets and JPMorgan Global Emerging Markets Income*. While there is always likely to be a tail of funds in which secondary market liquidity is poor, Winterflood analysis suggests that the majority of investment trusts offer reasonable liquidity and at the larger end of the market, we would argue that liquidity is good.
Sector underperforms in August
The FTSE All Share was down for only the second month this year with a decline of 2.2% in August. Investment Trusts underperformed for the fourth time in six months with the FTSE Equity Investment Instruments Index down 2.5% in August. So far this year the investment trust sector is up 12.1%, behind a rise of 13.3% for the FTSE All Share.
In corporate activity, Aberdeen All Asia is looking to adopt a Japanese only mandate and raise up to £100m through a C share issue. BlackRock Latin American has repurchased the majority of its convertible bonds through a tender offer with a view to converting or redeeming the remainder. International Public Partnerships has renegotiated the terms of its investment advisory agreement with Amber Fund Management. This has resulted in a lower management fee but an effective seven year extension to the contract. Marwyn Value Investors is seeking shareholder permission to make new investments following a placing of over 40% of its share capital at a discount wider than 30%. Following a difficult period for performance, Pacific Horizon is proposing bi-annual 5% tender offers at a 2% discount to NAV less costs. Hansa Aktiengesellshaft, a Swiss based investor, is to acquire SVG Investment Managers, the manager of Strategic Equity Capital, from SVG Capital.
August was a quieter month for issuance with £279m raised across the sector compared with £1.05bn in July. So far in 2013 £4.1bn has been raised compared with £2.1bn at the equivalent stage last year. There were no IPOs (initial public offerings) in August although Better Capital raised £186m for its 2012 Cell. Also last month the subscription shares for Perpetual Income and Growth* expired, raising capital of £28m. Crystal Amber placed shares at a 3% premium raising £26m. Earlier this month Twenty-Four Income Fund raised £30m through a placing, while Taliesin Property Fund, which invests primarily in German residential property, raised £12m through issuing ZDPs with a repayment date of September 2018 and a GRY of 7.5%.
*Indicates a client of Winterflood Securities.