The claim was made in its fourth paper of the Investment Trusts, Insight Series, which it is publishing for advisers ahead of RDR
As the largest investment trust manager in the UK, JPM argued allegations of a lack of liquidity within ITs can often be a red herring.
David Barron, head of investment trusts at the firm, said: "While the uptake among IFAs remains relatively low, private client wealth managers have been long-term supporters of investment trusts. These intermediaries are comfortable holding large positions in investment trusts on behalf of their clients, both in monetary terms and as a proportion of the overall fund.
"The long time horizon of most investors means that they can comfortably place instructions to buy and sell shares over several trading days if needed. And if wealth managers can do it, why not IFAs too?"
On the post-RDR "level playing field" JPM argued the largest, best-performing trusts, which are likely to attract the most attention from investors should be able to cope with increased demand for their shares, as these trusts tend to have higher trading volumes and therefore maintain higher levels of liquidity.
The paper outlined liquidity control mechanisms which can be implemented by the board of investment trusts, although it is worth noting one of the largest investment trusts in the UK, Alliance Trust, has been criticised in the past for not using more of these.
Liquidity control mechanisms:
- Conversion share (or C-share) issue – conversion shares allow new shares to be issued while protecting existing 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 NAV of the two portfolios.
- Share buyback – investment trusts can buy back a proportion of their existing shares, helping them to narrow discounts by reducing the number of shares available in the market.
- Tap issue – investment trusts can issue new shares at a premium to the net asset value (NAV) to meet demand.
- Tender offer – an incentive offer to shareholders to buy back shares, usually at a narrower discount than the prevailing price.
- Treasury shares – shares that have been repurchased can be held in treasury with the potential to reissue them at a future date.
Finally the paper illustrates the ways large inflows and outflows can impact open-ended funds and create performance or liquidity concerns. For more, click here.
