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Holly's Blog: Investment Trusts and Gobblefunk

25 Oct, 2019

More developments in the Woodford saga this week as blue-blooded City firm Schroders is appointed to take over the management of the Woodford Patient Capital Trust.

Blue-blooded City firm Schroders is appointed to take over the management of the investment trust – the Woodford Patient Capital Trust – and the markets breathed an audible monetary sigh of relief. The trust is up from lows of 30p to 38p, but before we get too carried away, this did launch at £1 and investors have lost nearly 60% over 3 years. Oooof.

Investment Trusts explained

Investment trusts are simply collections of shares – we’re getting someone else to do the choosing and ongoing management for us. They are a bit confusing because they are victims (or beneficiaries) of sentiment, and trade at what we call either a premium or a discount.

What does this mean? Imagine I set up a company and its sole purpose is to profit from investing. I call it the Holly Trust Ltd, in an act of marketing genius. I stick £100 into my company and with this money I buy 100 shares at £1 each. I then issue, say, 10 shares in Holly Trust Ltd at £10 a pop. Now if people think I am a genius and the best thing since sliced bread, they might all desperately want a piece of the action. And all this demand means Holly Trust Ltd goes up, even though the value of those underlying investments I own (those 100 shares) stays still. Shares in Holly Trust rise to £11 each given the halo effect, and at this point, the trust is trading at a ‘premium’.

On the other hand, let’s say I am caught falling drunk out of a nightclub whilst shouting rude explosive things about the CEOs whose companies I have invested in. (Doesn’t that sound like marvellous fun!) People might politely decide to desert me in droves. And so even though the actual shares I own are still worth £100, people get the hell out of Holly Trust and so the shares in my investment company dwindle to £8 each – I am ‘trading at a discount’.

The Woodford Patient Capital Trust is trading at a rather horrific 50% discount today. Which basically means people think it’s toxic. The bigger problem is that nobody, however sharp their suit, actually has a clue what most of the things in this trust are worth. Although very expensive consultants will use very clever formulae and nod at each other sagely, how do you value unproven companies which earn very little and burn cash? The honest answer is that it’s a finger in the air. This is speculative stuff.

Sloshfunking names

In a move which makes little sense to me, and doesn’t seem to have bothered anyone else, the fund will be renamed the Schroder UK Public Private Trust.

Who on earth cooks up these product names? What on earth is a Public Private Trust? It sounds like someone is having their cake and eating it, no? Volvo don’t have a Fast Slow car. Coke don’t make the Hot Cold drink. Gap don’t make Fat Skinny jeans. It’s an appalling name which communicates precisely nothing.

Names are important – they describe investments and tell us what to expect. To that end, I always thought that Woodford’s Patient Capital Trust was cleverly named in terms of expectation management. It was a collection of weird (certainly) and wonderful (hopefully) firms doing deubiquitylating enzymes and other gizzwozzery – as close to speculative as I get but I stuck it in my pension, prepared to ignore it for 10 years and, frankly, to be patient!

Once you start looking, weak names are rife and irritate me more than they should. Winner of my Rubbish Name Award for a financial product goes to Aviva. My workplace pension statement triumphantly tells me I’m in the Series 6 Av Divers Asset Fd II S6. Well woop-di-doo! Gotta love that Av Divers Asset Fd II S6! My future is safe with Aviva! YAY!! Reader challenge - who can find a name to top that one, in terms of incomprehensible rummytot!? Answers on a postcard please ( . . .