16 Dec 2010 | James Budden

Are the bad boys back in town? 

The investment trust industry has a terror of the arbitrageur – an investment organisation who buys a large stake in a trust and then agitates for realisation of that stake at a profit via tender offers, buy backs or even liquidation.

Boards tend to view such activity as self serving and counter to the long term investment aims of the majority of investors. But profit is profit and poorly performing trusts on wide discounts are particularly vulnerable to the designs of the wicked arb.

This kind of rationalisation is a case of survival of the fittest and quite often can prove beneficial in returning capital to investors. In fact this sort of investment efficiency is one reason behind the difference in size between the investment trust sector and its unit trust cousin. Investment trusts are good at giving back money when the time comes but unit trusts tend to sit on it until the investor finally cries enough.

The great credit crisis and its aftermath was not good for arbitrageurs as capital with which to go to work became scarce. But there are signs that this might be changing and small sub £50m trusts with weak performance had better look out.

During 2010 an estimated fifteen investment companies have been wound up with seven more currently undergoing managed wind downs. On top of that Electric & General announced recently that it was throwing in the towel after 110 years in the business. Also the daddy of the sector Alliance Trust is being badgered by Laxey to get real on share buy backs in the hope that a programme of repurchases might reduce what is an uncomfortably wide discount.

Corporate and shareholder action is part and parcel of the investment trust business. It keeps trust boards on their toes and makes them take performance, buy backs and marketing seriously. But as many a disingenuous type has whispered over the years “ if you have nothing to hide you have nothing to fear...” no trust is truly safe.