Client Affairs
JP Morgan Explains How To Manage Investment Trust Liquidity - White Paper
Concerns about low liquidity in some investment trusts are overstated and there are ways to tackle this issue, according to a white paper by JP Morgan Asset Management.
As part of the firm’s Investment Trusts, Insight Series, the papers are being produced for the benefit of financial advisors concerned about these closed-ended funds.
Shares of investment trusts can sometimes trade at a significant discount or premium to the underlying value, or net asset value, of a fund. This can happen if there is a surge in demand for the shares, or if the underlying portfolio of assets is illiquid, or if a management team is seen as underperforming, or due to a simple change in sentiment towards a sector.
“The issue of liquidity is often raised when referring to investment trusts; however to a large extent the concerns raised by advisors are overstated. There are sophisticated mechanisms in place to ensure that liquidity can be controlled and liquidity is specific to each trust,” said James Saunders Watson, head of marketing for investment trusts at JP Morgan Asset Management.
“An investment trust’s board can take action to boost liquidity by issuing new shares, and can also repurchase shares if the demand drops. This action is at the board’s discretion and can be suspended if market conditions are volatile - a benefit not available to an open-ended fund,” he said.
Solutions
Among issues covered are the issue of conversion shares – or C-shares – which enable new shares to be issued while protecting existing trust shareholders from dilution. The C-share portfolio trades separately for a specified period before being merged with the main trust. C-shares are then exchanged for a proportional number of ordinary shares depending on the net asset value of the two portfolios.
Other techniques to boost liquidity in trust’s shares include buybacks, which can cut the discount to NAV; tap issues, in which trusts issue new shares at a premium to the NAV; tender offers, and treasury shares.
The fourth paper in the Investment Trusts, Insight Series can be found here.