Investment trust insider on permanent capital vehicles – James Carthew: backfiring buybacks can be a permanent waste of shareholder capital
I put a comment in last week’s article about Syncona (SYNC) that I thought might attract more attention than it did. Talking about the importance of having cash to back up the financing needs of the companies it was investing in, I said this investment trust must be prepared to refuse demands for share buybacks even if it traded on a discount for a while.
We love jargon in our industry and all the different names we have come up for our funds – investment trusts, investment companies, closed-end funds – illustrate that. When you talk to asset managers from outside the industry though, the term that they tend to use is permanent capital vehicles.
Many investment managers see a big upside in having a fixed pool of capital to invest. They believe they will get to take a long-term view and hold illiquid investments, without having to worry about having to liquidate the portfolio in a hurry.
They will find it easier to be contrarian and buy when others are selling and, perhaps most importantly, they think they can be patient and worry less about short-term underperformance of a benchmark.
Lastly, for some asset managers, there is a hope that having some permanent capital will enhance the value that others place on their own businesses.
I think the investment company sector’s record of long-term outperformance relative to equivalent open-ended funds can be attributed, at least in part, to the ability to hold less liquid investments including small caps, as well as to use gearing.
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