Investment trust insider on Jupiter Emerging and Frontier Income – James Carthew: loyal Jupiter Emerging investors shun exit
Jupiter Emerging and Frontier Income (JEFI) is three years old and, in fulfilment of a promise made at IPO, has just offered shareholders the chance to cash in their investment at a price close to net asset value (NAV).
When the circular that accompanies this move was published, JEFI was trading at a 12% discount and its NAV had dropped by almost 20% from the issue price. The board and the manager will be pleased therefore that the vast majority of shareholders chose to stick by the trust.
In the event, 5.1% of shares in issue opted for an exit. A slice of the portfolio will now be allocated to a redemption pool, this will be turned into cash over coming weeks and the exiting shareholders should be sent their cash on 14 July at a price based on the value of the pool at 30 June.
This mechanism for providing liquidity to shareholders is an elegant one. Every year, at the directors’ discretion (because otherwise JEFI might be classed as an open-ended fund), shareholders can request that all or part of their holding is redeemed. The prospectus allows the directors to decide not to offer a redemption facility in periods of volatile markets and I think they might have been justified in refusing one this year.
In periods when the shares are trading fairly close to asset value, investors who want to get into the trust may be offered the chance of buying the redemption shares, minimising the shrinkage of the fund. Right now, however, with the shares on an 8.1% discount, it would probably make more sense to buy shares in the market instead.
My only beef with this type of liquidity mechanism is that it leaves room for the BlackRock Emerging Europe scenario: where a perfectly decent fund ends up disappearing because a liquidity event coincides with a period of particularly negative sentiment towards the investment company. I think it needs some kind of braking mechanism built in. Perhaps the maximum shrinkage of the fund could be capped at 20% or 25% and a second liquidity opportunity offered in short order if more than 50% of the shares are offered up for redemption. Three years after launch, JEFI’s board might want to rethink that aspect.
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