Scottish investment trusts could move south on "Yes" vote in referendum
By Simon Jessop and Nishant Kumar LONDON (Reuters) - Invented by a Scotsman more than a century ago, a fifth of the billions of pounds invested in the UK investment trust sector still resides north of the border. For how much longer is uncertain. Trends among investment trusts, listed vehicles which can themselves own shares in other companies, thus allowing a diversified holding while limiting transaction costs, typify increased corporate caution heading into Thursday's Scottish independence vote. Banks such as Lloyds and RBS have spoken of relocating from Edinburgh if Scotland goes independent and the investment trust sector could be another loss to Scotland, given the 41 trusts incorporated there, which manage a collective 23 billion pounds ($37.3 billion), are all listed in London. In the event of a "Yes" vote, trusts could opt to relocate to England, a move one of the largest, the 2.5 billion pound Alliance Trust, which serves savers as well as shareholders, has already positioned for. The Scottish trusts, pioneered by financier Robert Fleming, have a total market value of 19 billion pounds and recent market moves reflect increased uncertainties over the outcome of the vote, which opinion polls show is too close to call. Thirty-one of the 41 trusts traded at a discount to their net asset value on Sept. 15, data compiled by Reuters showed, and 22 had increased that discount or narrowed the premium from the end of August. Scottish-registered trusts have seen their average discount widen from 4.9 percent to 6.5 percent, while their English-registered peer group saw a smaller change in their average discount, to 8.0 percent from 7.1 percent, Iain Scouller, analyst at brokerage Oriel Securities said. "It appears to be disproportionately hitting the Scottish trusts, although if there's a switch back to 'No' in the next day or so it could help the discounts narrow," Scouller said. MARKET WEAKNESS As well as increased volatility in the market around the Scottish vote - the FTSE 100 Volatility index is up 43 percent since the start of September - broader market weakness has also been impacted by weak economic data and poor earnings growth, as well as reduced liquidity, said James Glover, client director at JP Morgan Asset Management. While UK mutual fund flows had held steady into early September, after stripping out special flow movements, the pace of outflows increased in the week to Sept. 12, with around $300 million leaving UK equity funds, data from Lipper showed. Unlike traditional mutual funds, investment trusts are "closed-ended", in that there will only ever be a certain number of shares in the fund, which is legally and organizationally a company. The value of those shares is then expressed in relation to the value of the investments the fund has made, with shares trading at a discount or premium to net asset value. Recent price action aside, the outlook for the industry in Scotland in the event of a "Yes" vote would depend on how the industry was regulated and under what tax regime trusts would operate - with the potential for a Scottish chancellor to be more generous than his or her counterpart in Downing Street. "Investment Trusts are under UK tax regulation, and get the capital gains-free tax treatment, so Scotland would need to transpose (those) or write its own rules ... and decide 'do we mirror them or do something different?'," said Julian Bartlett, partner in financial services at consultants Grant Thornton. Decisions would also be impacted by what a Scottish government intended to do with the tax structure around tax-exempt vehicles called individual savings accounts, said Oriel's Scouller, while the fact most trust shareholders were based outside Scotland could raise an additional currency issue. Oriel's Scouller said he expected "most, if not all" of the trusts to consider redomiciling. "By doing that you know what the regulatory regime is, you know what the currency is and you take away a lot of the uncertainties." ($1 = 0.6160 British Pounds) (Editing by David Holmes)
