Ian Cowie: it’s a shame this top-performing trust is set to close

Truth is often said to be the first casualty of war but now a unique, top-performing investment trust, which combines good capital growth with rapidly rising income, seems set to become collateral damage of conflict in the Middle East.

Despite leading the Association of Investment Companies (AIC) “Global Emerging Markets” sector over the past decade and five years, Gulf Investment Fund Ord (LSE:GIF) looks like a goner.

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No other investment trust offers such concentrated exposure to the Arabian Gulf, also known as the Persian Gulf, that includes Saudi Arabia, the United Arab Emirates (UAE) and Qatar. Its importance to investors seeking international diversification is that this is where massive sums of wealth are flowing out of oil and liquefied natural gas (LNG) to flood into other assets, pumping up valuations.

GIF’s top 10 underlying assets are led by two big shipping fleets, Qatar Gas Transport - also known as “Nakilat” - and Qatar Navigation, followed by Saudi Arabia’s National Commercial Bank and Middle East Healthcare. It is an attractive mix of different businesses in a part of the world that is largely overlooked or ignored by investment trust managers.

Now this small shareholder’s hopes that peace might break out in the Hamas/Israel conflict and GIF’s normal service could be resumed seem set to be dashed.

Epicure Managers Qatar threw in the towel on Monday this week, by announcing they intend to wind up GIF by selling its assets and returning cash to shareholders. The fund price surged nearly 9% higher on the day.

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I can’t complain because shares I bought for the dollar equivalent of £1.38 in February 2022, hit £1.84 this week. Taking a longer view, GIF delivered total returns of 132% over the past decade and 127% over five years before they swooned to just 5.7% when the violence escalated last year. But there is nothing small shareholders can do about any of that.

I admit this income seeker was encouraged to hang on and hope by GIF’s 4% dividend yield. Better still, this had increased by an annual average of nearly 22% over the past five years, according to independent statisticians, Morningstar.

If that rate of ascent had been sustained, it would have doubled shareholders’ income in just over three years and three months. Sad to say, recent shocking setbacks serve as a brutal reminder that investors have not been paid until the dividend cheque has cleared.

The immediate cause of GIF being wound up was a tender offer, intended to reduce its double-digit discount, which was taken up by so many shareholders that the fund would have fallen below the minimum viable size of 38 million shares, set by the managers. As a result, the tender offer will no longer proceed and, instead, GIF’s board will put forward proposals to shareholders for it to be wound up with a view to either returning cash to shareholders or entering a formal liquidation.

GIF says that it will publish a circular as soon as possible, setting out details of the board’s proposals and convening a general meeting at which shareholders will vote. Someone close to the fund managers, who asked not to be named, told me: “Part of the problem is that arbitrageurs were exploiting biannual tenders and double-digit discounts to profit at the expense of other shareholders.

“Another part of the problem is a surprisingly poor grasp of geography among many investors. Many people seem to imagine that the Gulf and the Middle East are the same thing but, as a matter of fact, it takes as long to fly from Tel Aviv to Riyadh as it does to fly from London to Athens.

“These regions are quite distinct although discounts never reflected that. On a brighter note, GIF’s underlying assets are quite liquid or easy to sell and the money raised should be distributed to shareholders before Christmas.”

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Anyone with an interest in military history will know that similar hopes have been dashed before. Those of us seeking to retain some exposure to the Gulf do not have much choice.

BlackRock Frontiers Ord (LSE:BRFI) is the only fund I could find with 12% of its assets in Saudi and another 7% in the UAE. It delivered lower total returns than GIF of 74% over the decade and 39% over five years and a marginally higher 7.6% over the last year. BRFI’s initial yield is higher at 4.3%, but rising much more slowly by 2.2% per annum over the past five years.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Gulf Investment Fund (GIF) as part of a diversified portfolio of investment trusts and other shares.