Unloved U.K. Equities See Schroders Fund Join List of IPO Misses
British equities may be cheap, but fund investors aren’t exactly piling in.
Schroder British Opportunities Trust raised 75 million pounds ($100 million) in an initial public offering, according to a statement on Friday. That’s less than a third of the 250 million-pound target set by the U.K.’s biggest money manager.
Other IPOs for U.K.-focused trusts have fared even worse than Schroders Plc’s effort, reflecting Brexit uncertainty weighing on the nation’s equities.
A trust pitched by Sanford DeLand Asset Management Ltd., which planned to invest in 30 to 50 smaller London-listed companies, never made it to the finish line. Tellworth British Recovery & Growth Trust Plc, which dubbed itself a “Best of British” fund, also withdrew an IPO last month after failing to meet its minimum size.
“It shows sentiment is so negative that even someone as big as Schroders, with their contact and distribution network, can’t pull off a hugely successful launch at the moment,” said Laith Khalaf, a fund analyst at wealth manager AJ Bell.
The U.K. is due to leave the EU’s single market at the year-end, with or without a trade deal in place, and negotiations between the sides have been deadlocked. Nervous retail investors have pulled more than 14 billion pounds from U.K.-focused mutual funds since the beginning of 2016, according to the Investment Association.
The Schroders trust will invest in both public and private company shares, seeking to take advantage of U.K. firms battered by the pandemic but likely to flourish in the longer term. The traded fund is also aiming to aid the U.K.’s economic recovery, by targeting firms too big for the government’s small business support but not at a scale to weather the crisis with ease, Schroders’ Chief Executive Officer Peter Harrison said in a statement earlier this year.
“Other funds tried to IPO recently and did not go ahead, indicating just how tough the market is,” a spokesman for Schroders said by email, pointing to the challenge of launches when all meetings are virtual.
Trusts are closed-ended, meaning that investors do not redeem their money from the fund but instead sell their shares on an exchange. This makes it easier for managers to hold stakes in unquoted or thinly traded companies than in a mutual fund, where investors can ask for their cash back on a daily basis.
However, that does mean investment trusts can often trade at a discount to the value of their holdings. JP Morgan Chase & Co.’s 1.75 billion pound Mercantile Investment Trust Plc is currently trading at a small discount to the value of its assets, although the gap has been as wide as 14% in recent months. The Miton UK MicroCap Trust PLC is at a 5% discount to its net asset value, despite gaining 21% in 2020.
“Most smaller companies trusts are trading at a discount right now,” said AJ Bell’s Khalaf. “So why pay full whack” for a new one, he said.
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