DCM? They're stealing my money!!!

Ark_Welder

Aren't rainy days wonderful. More time spent indoors browsing rather than outdoors, slaying plant-life.

Been reading an article on Citywire about Murray International and the current premium, and one of the follow-up comments prompted me to have a look at a few numbers. The next bit is a cut-and-paste from my own comment, with a few bracketed amendments:

http://citywire.co.uk/money/murray-internationals-runaway-premium-spells-trouble/a702574?ref=citywire-money-latest-news-list

...the answer can be found in the relevant annual report(s), many of which these days have a 10-year table containing helpful information: http://www.murray-intl.co.uk/aam.nsf/ITMurInternational/historicalreports

So the dividend for MYI (which is the ticker for Murray International, and not MI as is used in the article I]being an occasional rant of mine on the site in question[/I) grew from 1992 to 2001 and then remained static until 2004, after which it has increased from 16.3p per share to 40.5p.

In 2001 the revenue reserve was £31.1m. In 2004 it had fallen to £26.1m, (although this has been restated in later years as £31.2m due to the changes in accounting principles that affected all companies and not just ITs). By 2012 the revenue reserve had increased to £64.6m.

The total dividend for last year is slightly uncovered (0.98). The growth in revenue between 2011 and 2012 was minimal (£55,128m to £55,141m). However, the corresponding net revenue per share fell from 43.6 to 39.8, a fall of 8.7% - and that is one of the problems with discount control mechanisms that issue shares on a regular basis: it can be dilutive for existing investors unless and until the funds raised can be [quickly] invested into income-producing assets. Over the course of the year the total shares in issue - ordinaries plus 'B' - increase[d] by 9%.

So a premium might be a problem for those looking to buy into an IT, but it should be less of an issue for the existing holder - if it is an issue at all. The existing holder might be more worried by attempts to reduce a premium by the issuance of new shares, because this has the potential to negatively affect their income stream, even if only a few years down the line and not immediately, because revenue has to be split amongst an increased number of shares. If, of course, the income is what is important to them.

If anyone isn't sure, then it stands for Discount Control Mechanism


Apologies for the tabloidification of the title - it's the rain wot done it...:)

talexuser

Very interesting, thank you. MYI is on my 'possible' list if ITs to invest in outside of ISA. Maybe not now with others available?

Is this not just a short term fix since if they did this to any great degree the dividend and total return graphs would mean people jump ship to a better performing fund?

IronWolf

Existing investors should not lose out by new issues if they are sold at a premium to the current NAV. But this is one of the problems with 'income' funds as opposed to regular investment trusts.

Ark_Welder

Issuing new shares at a premium to NAV should benefit existing shareholders' capital. But in this case, the increase in revenues was only 0.02% in the financial year ending 2012, and the increase in the number of shares was 9%. So even though the net revenue has increased, net revenue per share has fallen by almost 9%. In effect, the same amount of revenue earned two years on the trot is being used to pay a dividend spread over 9% more shares, and an increased dividend at that.

Hence, an uncovered dividend in the last financial year, possibly resulting in a dip into the revenue reserve to be able to pay the dividend. Only 'possible', because the company will have been receiving income between the year end and the payment of the final dividend. So if the monies raised by the share issue can be quickly invested into revenue-generating assets then this might generate enough of an increase in income in the current year to make up the shortfall. Over to you, Mr Stout.


An example of how DCMs can impact on revenue is Personal Assets Trust. The influx of cash from issuing new shares to keep the level of the premium down, combined with the investment adviser's reluctance to buy assets that would generate a higher level of income, has been making it more difficult to raise the level of the dividend according to the trust's investment remit, which was to increase it in real terms over the longer term and to never pay a lower level of interim dividend than had previously been paid. Not any more. The commitment even to maintain the level of the dividend no longer applies. Whilst his shouldn't be an issue for the total return investor, it is an example of why implementing discount control is not a no-brainer option.

+++

I hold both PNL and MYI. The former, because the investment adviser and board do not feel obliged to buy assets that would generate a higher level of income when they believe them to be overpriced. The latter, because I am confident that the dividend is not under threat and can be progressively increased.

talexuser wrote: »

Very interesting, thank you. MYI is on my 'possible' list if ITs to invest in outside of ISA. Maybe not now with others available?

Is this not just a short term fix since if they did this to any great degree the dividend and total return graphs would mean people jump ship to a better performing fund?

MYI's recent NAV performance is mainly down to the low allocations to developed markets, such as the USA and UK, and more in emerging markets. With hindsight, the wrong call. So the decision the investor has to make is whether or not they want this EM exposure right now, and whether they're happy for the fund manager to either keep this or to move more into developed markets as he sees fit. Perhaps the persistence of the premium is a sign that investors are happy with the prospects for the fund. That, or the long-term performance is more hypnotic for now.


Which are the alternatives under consideration? This is of specific interest because MYI is a relatively new holding for me, and is intended to be the global equities portion of my SIPP in drawdown mode, once this is possible. The current allocation to EMs is an attraction, along with the low UK allocation, which is catered for elsewhere. An the manager's somewhat cynical views regarding the economic outlook will, I hope, offer a bit more protection against the downside - and this is what is important to me, right now. Perhaps the recent under-performance against peers will shake out some of the short-termist investors in the fund - good for me because I'm still building up the holding!

talexuser

My watch list includes Personal Assets (because like Troy Trojan), City London, Temple Bar, Edinburgh (but probably not because I already have IP Hi Inc?), Merchants and F&C Commercial. For something different Aberforth Smaller.

For racier punts Henderson Far East, Aberdeen Asian Smaller Comps.

I probably want to invest in 3 or 4 of these early next year.

Ark_Welder

talexuser wrote: »

My watch list includes Personal Assets (because like Troy Trojan), City London, Temple Bar, Edinburgh (but probably not because I already have IP Hi Inc?), Merchants and F&C Commercial. For something different Aberforth Smaller.

For racier punts Henderson Far East, Aberdeen Asian Smaller Comps.

I probably want to invest in 3 or 4 of these early next year.

I wouldn't exclude Murray International from your watchlist because it can complement each of the other funds, in one way or another. So more a question of whether you think it's the 'right one, right now' for your purposes.

Unless there is a compelling reason for holding both IP Hi Inc and Edinburgh then I would stick to one or the other. You get exposure to Woodford in either case. Holding both might mean not holding another similar fund, therefore reducing portfolio diversification-by-manager - if this is something that is wanted. In theory, Edinburgh could replace Woodford/InvescoPerpetual for another investment manager if they had reason, so this route could lead to a loss of exposure to his methods - something that is less likely to occur by holding the OEIC.

The decision might come down to the usual Open vs. Closed debate, including the merits - or otherwise - of IT gearing and buying at a premium/discount. Or it might be answered by any platform cost that may apply to holding one rather than the other. Another approach is to look at the holdings: EDIN has around 45, IP Hi Inc 118, although the top ten in both cases are of similar content and proportions (61.8% and 56.6%, respectively, according to the latest factsheets). Whether a concentrated number of holdings in EDIN is more desirable than the diverse number of holdings in Hi Inc can be looked at in the context of both the existing funds currently held in the portfolio, and those under consideration: i.e. how much of an overlap of holdings there is, and whether this matters - it may matter less if the intent is manager diversification. If the overlap is more with the smaller-sized holdings in IP Hi Inc, then this might be considered to be an acceptable diversification away from its top-ten holdings. The answer to which is likely to be more a case of a subjective opinion to match an individual need rather than an all-encompassing objective one.


I do have a 'two funds' situation by holding PNL and Trojan. Trojan is the longest held and is outside the SIPP, and PNL being inside (and since Troy took on the advisory role there). And they are achieving a similar objective, although the timescales are different. My excuse is that they're on different platforms, combined with an aversion to holding the same fund across platforms or for two purposes - but don't ask me to give a rational explanation for this!.

puzzledinvestor

They may be 'stealing' your dividend, but the capital gain more than compensates for that, especially with the premium at around 10%(!), whilst if it takes let's say 1 quarter for them to invest the money, you only need to pay for 1 quarterly dividend for the new shares, ~1%, and it will most likely take less than that.

From the annual report:
"Share issuance of £99 million at a premium occurred during the year. As I mentioned in my Interim Board Report, such issuance can have a dilutive effect upon the Company’s earnings as the dividend paid on newly issued shares may not have been earned in full over the year. This is not always the case but depends, amongst other things, upon the timing of issuance and yield obtained on the stocks in which we subsequently invest. We seek to mitigate the impact of any subsequent revenue dilution by paying quarterly dividends, investing the proceeds of new shares promptly and by not issuing shares during the period immediately before a dividend is paid. The objective is to ensure that, in terms of overall returns to Shareholders, the premium received on issuing new shares more than covers any revenue dilution during the period. The Board tracks these effects and shareholders were comfortably advantaged in total return terms in the year under review through the operation of the share issuance programme. This is demonstrated in the attribution analysis on page 19 of the Report. We continuously review the merits of share issuance and the premium to net asset value at which this is conducted. Our primary concern in operating the issuance programme is to ensure that it remains in shareholders’ best overall interests to continue with this activity."