Question
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? Answer
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.
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? Answer
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.
Read this Q and A at http://www.candidmoney.com/questions/question765.aspx
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