@Rainmaker - According to you, there is a very good reason why investment trusts trade at a discount and the primary one is that they are not managed to optimize shareholder returns.
Why are they not managed to optimize shareholder returns ? The mantra for all companies is to maximise shareholder returns. Thats the whole point. For eg companies like CINV & GUAR are 10 baggers todate even in this slump from 4 years ago. They have created shareholder value through
capital gains, splits, bonuses, discounted rights and share repurchases.
At this point, worth clarrifying that their are 2 types of Investment Trusts i.e. Open ended and closed ended. The type we are referring to are open ended i.e. CIT, CFI, CINV, GUAR, NAMAL etc.
The close ended ones are Unit Trusts / Mutual Funds etc. I think you are confusing the term "trust" again. In our local context, all our Investment Trusts are Investment holding companies and have the ability to purchase or dispose business units or minority holding stakes. Weather it is a Investment Trust or Investment Holding company (the same), we are comparing this to a Diversified Holding Company (JKH, HEMAS, CARSONS, CFLB etc and are trying to figure out weather the premiums / discounts currently seen, are warranted, especially for minority shareholder i.e. you and me (and not controlling Interests). " What is the future prospect of an investment trust? It is just the ability to get capital gains - if those gains are not capitalised and returned what's the point. You would just be going on a roller coaster ride."
The future prospect of an Investment Trust (or Holding company) depends on what underlying securities it holds in its portfolio. there are 4 sources of Income, Dividends, Interest Income, Capital gains and Share of associate company profit (if it owns over 20 % stake). If the underlying securities in the portfolio does well, then dividends and capital gains accrue (same as to the holder of a minority stake in a diversified holding company). In fact, the distinct advantage is that a Investment holding company or trust is more "diversifed" than even the diversified holding companies business units and we all know the diversification benefits in stock / company holdings.
" Investment holding firms are a different story to investment trusts. Investment holding firms have the ability to dispose or purchase business units - controlling stakes have controlling premiums. The holding firms don't have the debt levels that the individual business units."
All 3 statements are incorrect. Investment Trust = Investment Holding Company is different to Diversified Holding Company. All have to ability to buy / sell minority or controlling stakes if its their strategy or plan. controlling stakes have controlling premiums for controlling interests (and not you and me - minority interests). The holding company's debt level is the sum of the parts of the individual business units. it cannot be any other way !
@Knocknobbler - Very good points. very relevant and worth reading again.
@ Antonym - As usual, you hit the nail right on the head !