Special Paper No.11

Troy

Discount Control Mechanisms

Keeping Control

The discount is voluntary

Robin Angus, Director of Personal Assets Trust 1984-2020

With the recent publication of A Shared Journey, an Anthology of Personal Assets Trust Quarterly Reports, this seems like an appropriate moment to revisit one, and arguably the greatest, of the many contributions made by Robin Angus to the Trust and wider investment company sector: the ‘Discount Control Mechanism’ (‘DCM’).

Troy and the Board of Personal Assets Trust (‘PAT’) receive several letters and emails each year asking why we maintain the DCM. We recently even received the suggestion that we should stop issuing new shares in PAT and allow the Trust to trade on an expanding premium, thereby allowing existing shareholders to exit at an inflated price! Those who study Robin’s writings will know that, whilst such a decision might well provide a temporary uplift in the share price, the long term, and investing on behalf of the long-term shareholder, has always been PAT’s priority. Thanks to the DCM, PAT’s share price will move up and down in line with its net asset value (‘NAV’) – no more and no less – over the long run.

The aim of this Special Paper is to explain the merits of the DCM for investment trusts, and why it is particularly appropriate for PAT. After a year where investment companies’ collective discounts to NAV have widened sharply (see Figure 1) DCMs are as relevant as ever.

Discount Freedom Day

First, some ancient history. PAT introduced its DCM in November 1999, following the changes made to the Companies Act which allowed investment companies to buy back shares more tax efficiently. Before then, companies had been permitted to buy back shares for cancellation only by using revenue reserves, which were ordinarily utilised for smoothing dividend income. Directors were therefore understandably reluctant to use revenue reserves for buybacks. When the law changed on ‘Discount Freedom Day’, as Robin called it, an investment company was permitted to distribute realised capital profits by way of a redemption or purchase of its own shares. Companies could hold shares in Treasury and then subsequently reissue them. This, as Robin described it at the time, was “the best thing to happen to the trust sector since 1979 and 1980, when exchange controls were abandoned and capital gains tax within trusts’ portfolios was abolished in the first year of Mrs Thatcher’s rule.”

This change not only permitted trusts to buy back shares at discounts, thereby enhancing their NAV; it also made it possible to abolish the discount altogether, ensuring that a trust’s share price traded consistently close to its net asset value per share. Yet today, many trust boards overseeing liquid portfolios remain prisoners of their own discount and believe they can do little about it.

The DCM, in Practice

Since 1999, the Board of PAT had been responsible for setting the specific parameters under which the DCM operates. These include the level of discount and premium at which the shares are either bought back or issued. In June 2008, the Board went a step further, enshrining the DCM into the Company’s Articles of Association with a view to “outlawing the discount”. The DCM, now established, can only be reversed at the behest of our shareholders.

There was at that time, and remains, a long history of investment trust directors failing to meet promises to reduce their discount. Some trusts seem happy to issue shares when they trade on a premium but are more reluctant to buy them back when they trade below NAV. When markets become difficult, performance wanes or an investment mandate becomes less fashionable, it is easy to renege on prior commitments to shareholders. The market, however, is unforgiving. Broken pledges of this nature tend to undermine credibility, which in turn can lead to further steepening of the discount.

But I Love a Discount!

Many years ago, not long after Troy had been appointed as Investment Adviser to PAT, I met a private investor who said he liked investing in investments trusts. He also appreciated PAT’s capital preservation mandate but could not bring himself to pay a modest premium for the shares. I explained how the DCM worked, and he was disappointed, saying that he would wait for the shares to trade on a discount. I suggested that he might be waiting a while!

There is a small yet loud minority for whom the discount is a pre-requisite for investment. These are the traders, speculators and arbitrageurs who, by definition, tend not to be long-term investors. Rather, they are brokers thriving on portfolio activity, or arbitrageurs buying with a view to selling as soon as the discount has closed. They are often short-term and not interested in the Trust’s underlying investments. Most importantly, their aims and aspirations are not aligned with those of long-term shareholders. Trusts with DCMs, like PAT, tend not to attract this part of the market because there is no discount to play with.

Corporate financiers rarely advocate for a DCM. Their job, as it was once explained to me, is to ‘hatch, match and dispatch’ investment trusts or, in other words, to facilitate the IPOs, mergers and winding-up of trusts. The more activity the better. The same corporate broker said to me that PAT was ‘just weird’, and that the DCM would not work for other trusts. Perhaps this was because it was not in his interest. After twenty years, the evidence is there for all to see and I am pleased to say that a select few other investment trusts have followed, introducing their own DCMs with success.

A premium is just as bad. Excess demand pushes shares to a premium, in the same way that excess supply leads to shares trading on a discount. The outcome is exaggerated price movements in both directions, leading to undesirable volatility. As Robin reminds us, “Making up a loss of value caused by a change in rating from a 10% premium to a 10% discount is very hard indeed.” Our experience shows that a high premium, however desirable, is rarely sustained.

Shrink to Grow

PAT’s DCM has been tried and tested, through the market turmoil of 9/11 in 2001, the Global Financial Crisis of 2008/9 and the pandemic in 2020. Despite these tests and more, PAT has not sold at a meaningful discount since 1999 (see Figure 2). Over this time, the Trust has grown from £68m to £1.9bn. This has benefitted shareholders by lowering the Trust’s ongoing charge ratio from c. 1.2% when Troy was appointed Investment Adviser in 2009, to 0.67% today (see Figure 3). Buying shares at a modest discount and issuing at a small premium also enhances the Trust’s NAV. This has provided over £17m of benefit to shareholders since 20091. Yet, in order to grow, we must be prepared to shrink.

Most importantly, minimising the discount enables shareholders to sell their shares when they need to at close to net asset value. Such sale decisions can often occur at moments of market stress, which is usually when discounts are at their widest. Boards need to recognise the changing nature of an investment trust’s shareholder base, which is increasingly comprised of private investors. Directors, in our view, have a responsibility to provide shareholders an exit at a time of their choice, without suffering the penalty of a discount.

Equally important when thinking about facilitating the transactions of new and existing shareholders, DCMs help in improving investment trust liquidity. There are days and weeks when stock market liquidity dries up, as it did during the pandemic and during the mini-budget saga of last autumn. It is at times like these that Steven Budge and his team at Juniper Partners, who are responsible for the administration of the DCMs for all of Troy’s trusts, can step into the market to buy shares (see Figure 4). Our analysis shows that PAT, Troy Income & Growth Trust (‘TIGT’) and Securities Trust of Scotland (‘STS’) are more liquid than their respective peers of comparable size. This may be more important to some shareholders than others, but there is value in knowing that the exit exists.

It’s Not for Everyone

Of course, while a DCM may be appropriate for trusts invested in equities, fixed income and other liquid asset classes, it would not be suitable for those investing in illiquid assets such as private equity, smaller companies, alternatives such as renewables, music royalties and, the ultimate illiquid asset, property. And trusts of this type make up a greater proportion of the sector today.

Those using gearing aggressively may also have less flexibility to use buybacks. A falling market inherently increases gearing by reducing the value of the assets relative to fixed amount of debt; buybacks would exacerbate the problem. PAT has no structural gearing, and both TIGT and STS deploy sensibly low levels of gearing, via flexible bank lending. We have witnessed several incidents over the years of trusts being forced to suspend buybacks or reverse leverage at times of market stress. This may compound the matter.

Troy Trusts and DCMs

At Troy, we seek to be outward-looking. We are keen to advocate the benefits of DCMs to other fund management companies that manage investment trusts. I am always happy to meet managers of trusts to discuss the benefits of introducing a DCM.

Similarly, the PAT Board would be delighted to engage with other trust boards on the subject.

We believe this is all part of putting shareholders first.

Figure 1 – Investment company discounts widened in 2022

Past performance is not a guide to future performance. Source: Numis Securities, January 2023

Figure 2 – PAT Discount to net asset value

Past performance is not a guide to future performance.

Since sector established in 2010 Source: Refinitiv Datastream, 28 February 2023

Figure 3 – PAT ongoing charges ratio (‘OCR’) has fallen over time

Source: PAT Report & Accounts, 30 April 2022

Figure 4 – PAT shares in issue [RHS] – issuance & buybacks [LHS]#

Adjusted for Stock Split in 2022 Source: Juniper Partners, 31 January 2023


1Juniper Partners


Disclaimer
All information in this document is correct as at 9 March 2023. Please refer to Troy’s Glossary of Investment terms here. Performance data provided relating to the NAV is calculated net of fees with income reinvested unless stated otherwise. Overseas investments may be affected by movements in currency exchange rates. The value of an investment and any income from it may fall as well as rise and investors may get back less than they invested. The historic yield reflects distributions declared over the past twelve months as a percentage of the Trust’s price, as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions. Tax legislation and the levels of relief from taxation can change at any time. Any change in the tax status of a Trust or in tax legislation could affect the value of the investments held by the Trust or its ability to provide returns to its investors. The yield is not guaranteed and will fluctuate. There is no guarantee that the objective of the investments will be met. Shares in an Investment Trust are listed on the London Stock Exchange and their price is affected by supply and demand. This means that the share price may be different from the NAV.
Neither the views nor the information contained within this document constitute investment advice or an offer to invest or to provide discretionary investment management services and should not be used as the basis of any investment decision. Any decision to invest should be based on information contained within the Prospectus, Investor disclosure document the relevant key information document and the latest report and accounts. The investment policy and process of the Trust(s) may not be suitable for all investors. If you are in doubt about whether the Trust(s) is/are suitable for you, please contact a professional adviser. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. Although Troy Asset Management Limited considers the information included in this document to be reliable, no warranty is given as to its accuracy or completeness. The opinions expressed are expressed at the date of this document and, whilst the opinions stated are honestly held, they are not guarantees and should not be relied upon and may be subject to change without notice. Third party data is provided without warranty or liability and may belong to a third party. Ratings from independent rating agencies should not be taken as a recommendation.
Please note that the Personal Asset Trust is registered for distribution to the public in the UK and to Professional investors only in Ireland.
All reference to FTSE indices or data used in this paper is © FTSE International Limited (“FTSE”) 2023. ‘FTSE ®’ is a trademark of the London Stock Exchange Group companies and is used by FTSE under licence.
Issued by Troy Asset Management Limited, 33 Davies Street, London W1K 4BP (registered in England & Wales No. 3930846). Registered office: Hill House, 1 Little New Street, London EC4A 3TR. Authorised and regulated by the Financial Conduct Authority (FRN: 195764) and registered with the U.S. Securities and Exchange Commission (“SEC”) as an Investment Adviser (CRD: 319174). Registration with the SEC does not imply a certain level of skill or training. The product described in this document is neither available nor offered in the USA or to U.S. Persons.
Copyright © Troy Asset Management Ltd 2023

Website Terms and Conditions

Welcome to the website of Troy Asset Management Limited (“Troy”, “we”, “our”, “us”).  Please read these terms and conditions carefully.  By accessing this website you are indicating that you have read, acknowledge and agree to be bound by the following terms and conditions and that you have read Troy’s Privacy Notice (which can be accessed here).  If you do not agree to these terms, you must stop using this website immediately.

This website uses cookies and similar technologies.  Information about our use of cookies is included in our Privacy Notice accessed here.  You can edit your cookie settings on this website.

Troy Asset Management Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom which can be contacted at 12 Endeavour Square, London E20 1JN.  Troy is registered on the FCA’s register with firm reference number 195764.  Troy is registered with the U.S. Securities and Exchange Commission (“SEC”) as an Investment Adviser (CRD: 319174).  Registration with the SEC does not imply a certain level of skill or training.  Troy is the owner and operator of this website and can be contacted using the details set out in section 11 below.

This website describes Troy’s capabilities and is for information purposes only.  Nothing in this website should be construed as investment, tax, legal, accounting or other advice.

The securities described on this website are not intended for use and are not offered in the United States of America or to U.S. Persons.  Please see section 2 for further detail.

  1. Who may access this website – subject to local restrictions

The information on this website is directed at persons in the United Kingdom (“UK”) and not otherwise. The availability of any funds managed by Troy or services provided by Troy mentioned on this website in any jurisdiction other than the UK is subject to local restrictions.  Except as specifically set out below the funds mentioned on this website have not been registered or approved for distribution under the laws of any jurisdiction other than the UK.

If you are accessing this website from a jurisdiction other than the UK, you are required to inform yourself of and observe any applicable local restrictions.  If you choose to access the website and you do so from a country other than the UK, you do so at your own risk and Troy will not be liable for any breach of local law or regulation that you commit as a result of doing so. The information available on this website does not constitute an offer of, or an invitation to apply for or purchase, any securities.

Trojan Investment Funds and its sub-funds are UK funds established under the provisions of the European Directives on the co-ordination of laws, regulations, and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS”) (Directive 2009/65/EC) as implemented in the UK.  Trojan Investment Funds is authorised by the FCA.  Certain sub-funds are available for distribution in Ireland (for professional investors only), Singapore (for institutional investors only), Switzerland (for qualified investors only) and are registered for distribution to the public in the UK.

Trojan Fund (Ireland), Trojan Income Fund (Ireland), Trojan Global Income Fund (Ireland) and Trojan Ethical Fund (Ireland) are sub-funds of Trojan Funds (Ireland) plc which is an Irish UCITS subject to the laws of the Republic of Ireland.  Each is authorised in the Republic of Ireland by the Central Bank of Ireland, and is a scheme recognised by the FCA under the Financial Services and Markets 2000 Act (“FSMA”).  Trojan Fund (Ireland) and Trojan Income Fund (Ireland) are registered for distribution in Austria (certain share classes only), Germany (certain share classes only), Ireland, Italy (for institutional investors only), Singapore (for institutional investors only), Spain (certain share classes only), Switzerland and the UK.  Trojan Fund (Ireland) is also registered in Portugal (certain share classes only). Trojan Ethical Fund (Ireland) is registered for distribution in Ireland, Singapore (for institutional investors only), Spain (certain share classes only), Switzerland and the UK.  Trojan Global Income Fund (Ireland) is registered for distribution in Ireland, Spain (certain share classes only), Switzerland and the UK.

  1. Important information for U.S. Persons

This website as well as the securities described on this website are not intended for use and are not offered in the United States of America (including the District of Columbia or any other territory occupied or possessed by the United States of America) or to U.S. Persons (including residents of the United States of America, residents within an area subject to its jurisdiction and U.S. Persons who are resident outside the United States of America).  As such, by accepting these terms you represent and warrant that you are not a U.S. Person as defined under Regulation S of the United States Securities Act of 1933, as amended.

U.S. Persons interested in services provided by Troy should instead contact us directly on [email protected] or call +44 (0)20 7499 4030.

  1. Suitability of products and services

The products and services described on this website may not be suitable for all investors.  Troy does not provide investment advice or make personal recommendations to investors.  If you wish to obtain advice about the suitability, or have any doubt about the suitability, for you of products managed by Troy or services provided by Troy, you should contact a financial adviser.

Should you have any general queries or require support relating to Troy or its products and services, please do email [email protected] or call +44 (0)20 7499 4030.

  1. Risk warnings

The value of investments and the income from them may go down as well as up and investors may get back less than they invested.  Changes in rates of exchange may cause the value of investments to go up or down.  Past performance is not a guide to future performance.

Tax legislation and the levels of relief from taxation can change at any time.  Troy does not provide tax, legal or accounting advice and therefore the information presented on this website should not be relied upon.  Please consult your own financial advisor before engaging in any transaction.

The information on this website is for information purposes only and does not constitute a recommendation, solicitation, offer or invitation to purchase or sell any investment product, perform any other transactions, or conclude any other legal transactions.

Changes to website content

These terms and conditions and the information contained on this website is subject to change without notice and no guarantee is made as to its accuracy, completeness or fitness for a particular purpose. Troy has expressed its own views and opinions on this website and these may change without notice.  Troy is under no obligation to update information and visitors to this website should not rely solely on the information contained on this website in making an investment decision.

We keep our terms and conditions under review.  These terms and conditions were most recently updated on 8 September 2023.

  1. Intellectual property rights

Troy is the owner or licensee of all intellectual property rights (including copyright and database rights) that subsist in this website, and in the material published on it.  No right is granted to use the website:

(i) to create a database (electronic or otherwise) that includes material downloaded or otherwise obtained from the website except where expressly permitted on this website or by written agreement with Troy;

(ii) to transmit or re-circulate any material obtained from the website to any third party except where expressly permitted on this website or by written agreement with Troy;

(iii) in such a way so as to remove the copyright or trademark notice(s) from any copies of any material made in accordance with these terms.

No use of Troy’s name, logos and/or other trademarks (whether registered or unregistered) may be made by you without separate express written agreement being given by Troy (or its licensors).

  1. Liability

Whilst Troy has sought to ensure the accuracy and completeness of the information contained on this website as at the date of publication, save as required by applicable law and regulation, Troy gives no warranty or representation and accepts no liability in respect of the accuracy, adequacy or completeness of such information.

Whilst Troy endeavours to maintain the availability of this website Troy cannot guarantee that your use of this website will be free from error and/or uninterrupted.  Accordingly, the website is provided on an “AS IS” and “AS AVAILABLE” basis without any warranties of any kind.  We do not accept any liability arising from any interruption in availability.

Whilst effort has been taken to ensure that the website is free from viruses, no warranties are given that it is free from viruses and users are responsible for ensuring that they have installed adequate anti-virus software.  Troy shall not be liable for any viruses or any other computer code, files or programmes designed to interrupt, restrict, destroy, limit the functionality of or compromise the integrity of the website or any hardware on which it is hosted.

  1. Third party websites

This website may contain links to external websites operated by third parties.  These links are included to give users the opportunity to access other pages that it is felt may be of assistance to them.  Troy makes no representations as to the accuracy or any other aspect of the information contained on such websites and Troy accepts no responsibility for the content of such websites.

  1. Data protection

On some pages of this website, users are asked to contact Troy to provide, or obtain, further information.  Please refer to our Privacy Notice (which can be accessed here) which provides information about how we gather and use personal information.

  1. General

Each of the paragraphs of these terms and conditions operates separately.  If any court or relevant authority decides that any of them are unlawful or unenforceable, the remaining paragraphs will remain in full force and effect.

If we fail to insist that you perform any of your obligations under these terms and conditions, or if we do not enforce our rights against you, or if we delay in doing so, that will not mean that we have waived our rights against you and will not mean that you do not have to comply with those obligations.

These terms and conditions are governed by English law and are available only in English.  You and we both agree that the courts of England and Wales will have non-exclusive jurisdiction over any dispute or claim arising under these terms and conditions.

  1. Contact details

Troy Asset Management Limited, 33 Davies Street, London W1K 4BP, United Kingdom; Telephone +44 (0)20 7499 4030; Email [email protected].  Troy Asset Management Limited is a limited company registered in England and Wales under company number 3930846 and has its registered office at 33 Davies Street, London W1K 4BP , United Kingdom. Except where otherwise required by applicable law or regulations, all communication and documentation sent to you by Troy will be in English.  You may communicate with us in English.

For more information about this website, including information concerning the personal data Troy holds about you, please contact us by email via [email protected].

© Troy Asset Management Limited 2024. All rights reserved.

 

 

I accept these Website Terms and Conditions