It shouldn’t dilute existing shareholders. In fact, it should benefit them slightly (although not as much as the managers of the trust who usually charge fees as a percentage of the assets managed!)

In short, although the number of shares increases so does the net assets of the trust so the value per share for existing shareholders isn’t reduced.

However, there are a number of factors at play, working in both directions, so in the real world it can get a little messy.

To use a simple example, say a trust has assets of £100, a share price of 110p, and 100 shares. That means its market cap is £110 and it is trading at a 10% premium.

If it issues 10 new shares at the current market price this would raise £11 in new money.

Its net assets would then be £111 and the net asset value per share would rise to 100.91p (£111/110 shares).

What happens to the share price depends on how investors perceive the trust’s prospects. If they are still happy to pay a 10% premium then, in theory, the share price would rise to 111p.

In practice, new shares are usually issued at a slight discount to the current share price so the effect on net asset value is muted somewhat. Also, larger issues of new shares can sometimes reduce the price in the market, although the effect tends to be temporary.

(If a trust was trading at a discount then issuing new shares would have the effect of reducing the net asset value per share but it’s very rare that this actually happens, as far as I know anyway. A trust is more likely to buy back shares when it’s trading at a discount, creating a little more demand and helping narrow the gap between a trust’s net asset value and its current share price.)

There are a couple of other benefits to issuing new shares. If a trust grows significantly in size via new share issues then the managers may feel able to reduce the percentage fee they charge for running it. Other trust costs (audit, legal, directors, custody etc) should fall on a per-share basis as they tend to relatively fixed.

A larger trust may also attract more investors, increasing its premium or reducing the bid-offer spread on its shares.

On the flip-side, a larger trust may not be able to invest in the same proportion of assets going forward if some of its investments are illiquid – like smaller companies or unquoted assets. So the quality of its portfolio may suffer especially if it overpays in a rush to expand.

Hope that’s useful – I must admit that answer was a lot longer than I expected when I first started writing it!!

I listen to that podcast most weeks and it provides a very useful overview of what’s been happening, especially in sectors I rarely look at otherwise. One for hardcore IT fans.

Many thanks for your excellent annual review. Over the years I have invested in shares, with varying degrees of success. However, as I get older I am concentrating more and more on ITs. Following is not as much fun as investing directly in shares, but it allows one to sleep more peacefully at night and not agonise about what to do with the likes of former blue chips like Royal Dutch Shell, Glaxo and Pearson, or the various small cap shares which flit in and out of fashion.

You may well know all about this source of free IT information. But I thought I would mention a weekly podcast called Money Makers, where Jonathan Davis, editor of the Investment Trust Year book, chats with Winterflood’s Simon Elliott about the latest results/updates across the IT world. A link to it can also be found on the AIC website.

https://money-makers.co/money-maker-podcasts/

I have listened to a couple of the podcasts and found them useful.

Please keep up your blog. It is much appreciated

Best wishes

Bill

Hi Marc,

Basically I wanted to trim back my overall number of holdings a bit, as I was buying a few new ones to invest in biotech/healthcare, and these were the ones I had the least confidence in for the long term. I did a separate article on the Murray disposal here: https://www.itinvestor.co.uk/2020/08/waving-goodbye-to-murray-international/

Thanks, Tom.

LTI is definitely hard to read. That big holding in the management company and the fact that it doesn’t tend to issue new shares make it a hard trust to hold onto despite its great long-term performance.

2020 was an extraordinary year, and 2021 has started pretty punchily (in Washington, anyway…).

2020 was of course the year for Baillie Gifford. I wonder how 2021 will unfold for them. I have a better sense of their portfolios now than I did & understand the tech case – however many of the valuations seem ridiculous to me.

I’m still amazed at the collapse, if not too strong a word, of Alexander Darwall – the figures are not what they were, following Wirecard and then Grenke. He was so impressive for so long. And extraordinary following Woodford and their decisions to set up their own shop.

Another fascination for me has been the volatility of Lindsell Train IT. Still hard to imagine it was at a 100% premium 18 months ago, and then at a discount about 6 months ago!

Good luck for the year ahead!

Thanks, John. It still feels like I have a lot to learn about trusts even after a few years of writing about them.

Let’s hope Lockdown 3 is the last!