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What are Shroder Oriental Income C shares?

Investment | Investment Trusts Helpful? 5

Asked by peter48, submitted 22 May 2013.

Open Quote What are Shroder Oriental Income C shares now on offer?

I wonder if you can help as no one at Interactive Investor, Schroder nor Affinity could deal with the concept of 'C' shares being offered by this popular Investment Trust . Schroder Oriental Income have allocated current share holders ( in my case inside an ISA) with subscription shares which, I understand, for £1 can be converted into C shares. So really my query is what happens next once an investor has bought such C shares?
End Quote

Answered by Justin on 28 June 2013

C shares are simply a way for investment trusts to raise money.

When investment trusts want to attract more money under management, they need to issue more shares. But unlike unit trusts, they can't simply create extra units/shares on demand, it needs to be via a formal share issue - with 'C' shares the usual route to doing so.

C shares are a short term home for new subscriptions. Once money is raised and invested, then the C shares are converted into ordinary shares in the main investment trust. Why go to all this bother? It makes life much simpler - the shares can be offered at a fixed price then converted at the prevailing price later on, plus it avoids affecting the performance of the existing investment trust by suddenly injecting a whopping amount of cash and existing investors partly having to foot the bill for stamp duty and dealing charges on new investments purchased.

The potential advantage of buying C shares is avoiding premium to net asset value (around 3% on the Oriental Income Trust). In English this means the shares currently cost about 3% more than the value of the underlying investments, largely because it's a popular trust with more buyers than sellers - hence the extra share issue.

When C shares are converted into ordinary shares (in this case by 16 July) they buy those ordinary shares at net asset value, not the prevailing share price, hence avoiding any premium there might be at that time.

However, this potential benefit may be partly offset by the net asset value of C shares being reduced to cover the costs of issue - in this example by about 1.4%.

Should you buy C shares instead of the existing ordinary shares? While they can avoid paying a premium for the existing shares, bear in mind the cost of issue and period the fund not be fully invested, which could drag short term performance versus the ordinary shares if markets rise meanwhile.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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