2nd February 2024
A topical Crescendo this week as today’s (Thursday 1st February) developments at Gresham House Energy Storage (GRID) warrants some comment. We are still getting to grips with what the long-term implications are and whether the price drop today after precipitous falls this year (down 56% in January alone at the time of writing), represents an opportunity to arbitrage between perception and reality. But our immediate reaction to the dramatic share price fall is that this has more to do with technical factors than fundamentals, albeit the fundamentals have undoubtedly changed.
Many shareholders simply cannot tolerate dividend cuts or a break in the original thesis so just sell and ask questions later. GRID, like Digital 9 Infrastructure and Hipgnosis Songs and many others from the halcyon days of low interest rates, have failed to deliver on the common promise of a c.10% total return of which c.5% from income. The desire for alternative sources of income when bond yields were pitiful drove lots of money into these launches and were unsurprisingly very popular with wealth managers. Now with disappointing performance since IPO, much more complicated businesses than originally anticipated and now the final straw of a dividend cut, those trusts no longer meet the criteria for inclusion in the Property or Alternative Income buckets, but with no Special Situations bucket in the typical asset allocation frameworks, the most obvious course of action is to sell it and buy a gilt instead. The problem is that those troubled investment trusts don’t have a ready-made pool of buyers to mop of that sudden glut of supply, so the price inevitably falls until there is a clearing price where a different type of buyer steps in. That transition of the share register takes time as buyers might need to do further research while the sellers just want out immediately. Subject to available cash, which is unlikely in most distressed situations, the Board should immediately step in and seek to buy shares at depressed levels to help rectify that short term imbalance but also because it represents a very accretive allocation of capital.
The investment trust sector hasn’t helped itself lately with a few failed trusts in recent years impacting sentiment towards the entire sector combined with many launched at the top of the market that have over promised and under delivered. However, most of those trusts that launched in the golden years of 2018-2021 had continuation votes kicking in 5 years from IPO, which the board and managers probably didn’t expect to come into play (we recall one manager telling us there is no way the trust will ever trade on a discount and yet it is on a 33% discount today!). Those upcoming votes on trusts languishing on wide discounts will force boards to review the strategy following shareholder consultations given some are sub-scale and might represent an embarrassment having failed to grow. Look out for those with catalysts as the status quo for many is unsustainable.
Daniel Lockyer – Senior Fund Manager
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