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View on Aberdeen Asian Income C Shares?

Investment | Investment Trusts Helpful? 21

Asked by Islaylassie, submitted 25 October 2012.

Open Quote I've read recently that the Aberdeen Asian Income Trust is launching C-shares which will trade at a lower premium than the existing shares - about 2%, just under 1/3 of the premium on the existing shares according to an article on Trustnet.

The article said that the money will be invested by 28 June 2013 at the latest, presumably in the same companies as the existing shares but it doesn't explain. It also says that "they will convert to ordinary shares on an NAV for NAV basis".

I decided I don't really understand and wondered if you would kindly explain!

Would you consider this an opportunity to invest, and is it ever sensible to buy an IT that is trading on a premium?
End Quote

Answered by Justin on 26 October 2012

When investment trusts want to attract more money under management, they need to issue more shares. But unlike unit trusts, they can't simply create extra units/shares on demand, it needs to be via a formal share issue - with 'C' shares the usual route to doing so.

C shares are a short term home for new subscriptions. Once money is raised and invested, then the C shares are converted into ordinary shares in the main investment trust. Why go to all this bother? It makes life much simpler - the shares can be offered at a fixed price then converted at the prevailing price later on, plus it avoids affecting the performance of the existing investment trust by suddenly injecting a whopping amount of cash and existing investors partly having to foot the bill for stamp duty and dealing charges on new investments purchased.

The potential advantage of buying C shares is avoiding the current premium to net asset value of around 7% on the Asian Income Trust. In English this means the shares currently cost about 7% more than the value of the underlying investments, largely because it's a popular trust with more buyers than sellers - hence the extra share issue.

When the C shares are converted into ordinary shares (due by 28 June 2013 at the latest), they will buy those ordinary shares at net asset value, not the prevailing share price, hence avoiding any premium there might be at that time. However, this will be partly offset by an initial charge of around 2% (slightly less if fully subscribed) when buying C shares to cover the costs of issue.

Should you buy C shares instead of the existing ordinary shares? If you want to invest now, it's arguably worthwhile in order to avoid paying a premium for the existing shares, even after the initial charge on C shares. But bear in mind the fund won't be fully invested immediately, which could drag short term performance versus the ordinary shares if markets rise meanwhile. And, if you weren't otherwise planning to invest now, the existing premium to net asset value may well decline by the time the C shares are converted, due to greater supply of shares.

There's little reason to avoid investment trusts at a premium provided you're confident the premium won't fall, by much at least. This is very difficult to predict, but in simple terms if the trust is likely to remain popular (most likely thanks to strong performance) then a premium will likely remain - notwithstanding the possible impact on the C share issue.

You can read full details of the Aberdeen Asian Income Trust C Share issue in the prospectus here.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (4) - To post a comment please register or login .

Comment by rafferty at 7:23pm on 27 Oct 2012:

I would tend to avoid paying a significant premium for an IT unless there was a fairly fundamental long-term justification such as the trust having income from subsidiary activities not reflected in the NAV. I'm very wary if the premium is due to a trust being in a currently fashionable investment area, or if there's high demand because it's an area covered by few other funds, or solely due to previous outperformance. Those factors can come and go, witness FCSS.

A premium can also be a direct drag on the performance of the investment. If you pay £110 for assets worth just £100 then those assets need to be sweated harder for the same return than if bought at par or discount. Where fees are linked to the share price then the investor will also pay higher fees than when at a discount.

A premium increases risk as if performance falters then losses will be magnified by the vanishing premium. Nick Train, manager of the Lindsell Train investment trust, has warned investors to avoid buying his own trust at the current premium, pointing out that the last time the trust’s shares traded at such a premium, at the end of 2001, within two years it had fallen to a 15 per cent discount. Although the NAV fell just 10%, investors lost 28% due to the shift from premium to discount. More...

Where an IT is at an unjustified premium then I generally look elsewhere, including at comparable UTs if necessary, until the heat goes out of it

Comment by peter48 at 10:15am on 31 Oct 2012:

Thanks for your comments as the official literature on this is verbose and opaque. This share has been very good for me and I was thinking could I get a good deal here even though I was not thinking of getting more. I guess from the above opinions unless you were already in the market you would not gain that much really especially if the premium drifted downwards. - also I understand its £1000 minimum subscription.

Comment by ivanopinion at 9:12am on 08 Nov 2012:

Doesn't this mean that existing holders of this trust have an arbitrage opportunity? They could sell their current holding at 107% of net asset value and instead subscribe for these new shares at 102% of net asset value. Of course, they will be out of the market, so they could miss out on any growth until the new shares are fully invested. But isn't there some way of hedging this risk, say by spread betting or buying a future? Not necessarily within the reach of the average punter, but won't big investment houses with large holdings be exploiting this?

Comment by BernieB at 10:45pm on 05 Dec 2012:

I agree with Rafferty's comments. I also use the Bestinvest website, research tab, investment companies, then search to check their comments on investment trusts. They are usually informative and at the bottom left of the page there is normally a comment on the current level of premium or discount and high ... low scores for the previous year. This provides some idea of whether you are paying over the normal odds for a fund though the quoted figure for the discount doesn't always tally with the one quoted by Trustnet.