Ian Cowie: mixed fortunes for high-risk investment trusts

Now that one of the biggest investment trust launches ever has seen its price slump by 89% since launch, is it an opportunity for shareholders to buy a bargain, by doubling down at a deep discount to net asset value (NAV), or to simply throw good money after bad?

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That is the conundrum facing this long-suffering small shareholder in Schroders Capital Global Innovation Trust Ord (LSE:INOV), which originally hoped to commercialise biotechnology discoveries by British universities. This investment trust, which raised £800 million at its initial public offering (IPO) nearly a decade ago, is probably still best-known as Woodford Patient Capital (WPCT) after its former “star fund” manager.

Since management was replaced by Schroders five years ago, their attempts to stage some recovery has seen the share price halve. Now they plan to let investors vote to choose between continuation and winding up the fund before its annual meeting next May. A circular, setting out details, is expected next month.

News of the vote prompted the shares to spike nearly 10% higher that day. Even so, they remain priced an eye-stretching -47% below their NAV.

This raises the tantalising prospect of buyers today turning £6.30 into £10 if, as seems likely, INOV shareholders vote to get back into cash next year. Sad to say, such hopes need to be taken with more than a pinch of salt.

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Seasoned analyst Alan Brierley of the stockbroker Investec explained to me: “First, there is uncertainty about the outcome of the vote; with so many retail investors onboard, they might decide to give INOV another chance.

“Second, there is uncertainty about the NAV because of the high proportion of unlisted assets in this trust. Third, even if shareholders do vote for a wind-up, it could take years to sell those assets and return cash to shareholders.”

That’s enough to make even this habitual optimist remember the first rule of holes. When you find yourself in one, stop digging. As I have reported several times since investing at £1 per share in the April 2015 IPO, for stock that trades this week at 11p, the only thing I got right with INOV was restricting my investment to 1% of my life savings.

It was always obvious that INOV was a high-risk punt, where the start-ups being backed might take a long time to come right - if ever. So I went in with the intention of remaining invested for 10 years.

Now, having nearly done so, it seems unlikely there will be any happy ending. But wishing won’t make it so and increasing my investment might merely mean I lose more money.

On a happier note, with another investment trust that gives access to assets which are not listed on any stock market, I have topped up my holding in Edinburgh Worldwide Ord (LSE:EWI). After originally investing at £1.52 last January, I paid £1.80 last month for shares that traded at £1.90 this week.

The explanation is rising excitement about EWI’s stake in Elon Musk’s Space Exploration Technologies, or SpaceX. The latter is not yet traded on any stock market but, via its Starlink subsidiary, has put more than 6,000 satellites into low-Earth orbit (LEO).

These have brought mobile telephony and the internet to many parts of the world that were previously offline and played a high-profile role in the Ukraine war.

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More importantly from a commercial point of view, SpaceX and Starlink have the potential to replace every conventional internet services provider (ISP) on this planet. It all depends on whether these LEO satellites can crank up their data volumes sufficiently to provide cheaper and quicker connectivity than cables still being expensively installed below the ground and the sea.

Your humble correspondent’s cerebral software dates back to the 1950s, so I will not attempt to analyse the technical aspects of extraterrestrial technology. But, down here at ground level, I can see that Musk has established himself as “buddy in chief” to president-elect Donald Trump, and I suspect next year might be a big one for SpaceX and Starlink.

Nor am I the only one, with Bloomberg reporting that SpaceX is raising funds from institutional investors on the basis that this business is worth $350 billion. Bear in mind that a successful tender offer earlier this year valued it at $210 billion.

Whether you regard that progression as an egregious example of a bull market going bonkers, just before the bubble bursts, or growing momentum with more to come, is a matter of personal choice. But I prefer to see it as a modern example of an original advantage of investment trusts; enabling small investors to gain exposure to assets that had previously been open only to the largest capitalists.

With SpaceX and Starlink gaining altitude, and 12% of EWI’s assets invested in these stratospheric assets, the sky’s the limit. Let’s hope they don’t fall to earth as painfully as INOV, WPCT and Woodford did.

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

Ian Cowie is a shareholder in Edinburgh Worldwide (EWI) and Schroders Capital Global Innovation (INOV) as part of a globally diversified portfolio of investment trusts and other shares.