Alliance Trust and Witan Deal Will be First of Many

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Alliance Trust (ATST) and Witan Investment Trust (WTAN) have agreed to merge, in what is the largest deal to date within the investment trust sector.

There have been a number of investment trust mergers in recent years, including the tie up of Troy Income & Growth Trust (TIGT) and STS Global Income & Growth Trust, which took effect in March 2024. One might expect the trend to continue.

Closed-ended investment companies can represent an attractive investment vehicle for investors. They comprise long-term capital, meaning that, in theory, they do not face the same liquidity constraints as their open-ended peers. This permits a broader investment universe and some more specialist investment strategies.

In addition, trusts can gear up which can accentuate returns (and losses). Despite this, many have proven unpopular in recent years. Discounts to NAV have generally widened.

Why Investment Trust Discounts Won’t Disappear

Indeed, the number of investment trusts trading at a discount has increased, and they have been impacted by a number of unwelcome developments.

Of the 207 investment trusts over £100m on Morningstar Direct, just seven traded at a premium to NAV at end May 2024, including the giant closed-end investment company 3i (III). The average discount among this group was a whopping -13.8% to NAV. This makes for poor reading in the industry.

Discounts to NAV have long been studied by academics, who dub this the “closed-end fund puzzle.” It is well known that closed-end funds typically trade a discount to the sum of their holdings. The efficient pricing of their shares is impacted by liquidity and sentiment towards a strategy (i.e. expectations of future performance), but some argue the market fully discounts the impact of fund costs, which they say are fully baked into the price. Indeed, costs are paid from by from NAV.

This latter point is important. Under “PRIIPS” fee disclosure rules, representative fee figures include the cost of debt and other operational costs, and treat all investment trusts the same way as the hedge fund industry. More fee transparency is a good thing, but critics of the regulation say that these costs were already reflected in discounts to NAV: costs are being double-counted.

That is open to debate. Still, the claim will become more germane as the costs of gearing may be expected to go up as trusts roll over their debentures and other forms of debt at higher interest rates.

The General

The full article is available here. This article was published at Morningstar Closed-End Funds.