THE Financial Services Authority deserves unqualified support for its proposals to relax rules governing the stock market listing of investment trusts.
It is quite simply right that investment trusts should be able to use all the tricks in the investment tool kit. It is wrong that these oldest established collective investment vehicles are hampered in the way they are.
Under the current regime investment trusts must operate with one arm tied behind their backs. It is high time they were allowed to grasp at the plentiful investment management opportunities with both hands. The first investment trusts began to appear in the later part of the 19th century. At the start, and for most of the last century, investment trusts had little need of being able to sell shares short - that is, invest in the belief that a share price will fall rather than rise.
Eighteenth century investment trusts had little need of derivatives either.
But the 21st century investment playing field is different. Hedge funds, which have the capacity to sell short and invest in derivatives, are roaming far and wide. In terms of capital invested and influence bought, hedge funds run the quoted investment trust sector ragged. It is high time that the playing field was levelled.
This is not to say that existing investment trusts should immediately start selling stocks short and investing in derivatives. Many may decide, with ample justification, that there is no need. But investment trusts, hidebound in the current regulatory regime, are in danger.
Some might even go as far to say that the UK investment ment trust industry is on a road to nowhere. But investment trusts should not be left in limbo because they have value, and are attractive. There is plenty of life left in closedended structure. It is a bonus that most are set up to operate in perpetuity. The existence of a board of directors separate from the investment management function is enormously beneficial, albeit the two constituencies of interest have not always been as detached as they might be.
Investment trusts need to thrive in order to serve the interests of our ageing population too. Most of us need to save harder and while there are plenty of decent investment vehicles, the investment trust is under utilised at present.
In addition, the hedge fund industry has much to gain from a rewriting of the investment trust listing rules. For they, complete with their penchants for short selling and derivatives, will be able to list as public companies in the same way that investment trusts do. Hedge funds tend to be portrayed as shadowy institutions, shrouded in mystique and suspected of sharp practice. There is no smoke without fire and there are plenty of hedge funds whose behaviour fuels the shadowy mythology. In the final analysis, however, hedge funds are investment funds in the same way that investment trusts are. There are differences, but there is more that unites them than divides them.
Public listing will present hedge funds with disclosure obligations and this will build respectability.
Two other suggestions made yesterday by the FSA are less welcome. The FSA seems nonplussed at the way contracts for difference (CFDs) are used to mask stake-building. The suggestion that the threshold for disclosure of directly held shareholdings be lifted from 3 to 5 per cent also works against open market principles.
Waiting game now on for LSE
IF YOU were to design the ideal structure for the world’s stock exchanges, after the consolidation that everyone believes is inevitable, you would probably end up with a link between Euronext, which operates the Paris Bourse and three others on the Continent as well as the Liffe London financial futures market, and the London Stock Exchange.
Euronext, of the various suitors that have courted the LSE, is probably the one Clara Furse and the her board would have preferred. It would have corrected the 2001 failure of the LSE to buy Liffe, now seen as the real reason why London has been the recipient of so many bid approaches rather than the instigator of the same.It would have entailed few of the back office and regulatory problems of a link with Deutsche Börse. It would have brought with it far more revenue enhancing and cost-saving benefits than any link with Nasdaq, the US exchange that yesterday packed in its 950p a share offer and walked away.
The Euronext-LSE link never happened, and now may never happen, because of the year-long Competition Commission inquiry into the European stock exchange consolidation that concluded late last year. By the time the Commission reported favourably on the consolidation logic, the LSE shares price had run far ahead of what Euronext could see as being affordable.
With Nasdaq now out of the frame, the only other credible bidder, the New York Stock Exchange, has time on its side. Expect Ms Furse and John Thain, her NYSE counterpart, to play a long game. LSE, for the time being, is on its own.
Mutual wooed
TAKEOVER mania has been back for months, but it must have reached fever pitch if several suitors are stalking Equitable Life. Charles Thomson, the chief executive, reports that he is in “serious discussions” to sell part or all of the mutual’s remaining business.
The fund has an improving solvency margin and so it might be of interest to a really ambitious vulture fund that collects closed life funds and tries to cut costs. The mutual’s policyholders might not agree to that, although they would have been happier without the cost of that £45 million failed legal action.
Selling to an ongoing company could be more attractive, but the most likely appeal for buyers is Equitable’s renowned annuity business. Prudential, for one, is likely to show interest in this. Annuities are a growth business and size does spread most normal risks, if not the kind of risky annuity promise that floored Equitable.
Book bind
THE Competition Commission may be minded to allow HMV’s takeover of Ottakar’s but the delay may cost Ottakar’s shareholders dear. Since the 440p a share bid was announced, Ottakar’s has come out with really poor trading results. Its shares, at 340p, already anticipate a much lower offer. That reflects badly on market intelligence HMV was getting via its Waterstone’s bookshop chain. But Ottakar’s bosses will find it hard to complain unless they can resurrect their own 400p a share buyout plan, which prompted HMV to act.
