Interactive Investor

High-yielding investment trust to wind up after share price plunge

The scrapping of its dividend target for the financial year caused its share price to plummet. But higher interest rates have also been a key part of the story, as Kyle Caldwell explains.

29th January 2024 10:26

Kyle Caldwell from interactive investor

The board of digital infrastructure specialist Digital 9 Infrastructure (LSE:DGI9) has announced it will seek shareholder approval to close its doors. If given the green light, assets will be sold off and capital returned to investors.

The trust, which focuses on what is sometimes called “the plumbing of the internet”, such as data centres and fibre-optic cables, saw its share price plunge since it announced in late September that it would be scrapping its dividend target for its 2023 financial year. Since that announcement, its share price has halved, and is currently 28p.

At the same time, its discount – the difference in the share price to the value of the underlying investments (the net asset value or NAV) – has ballooned to -76.1%. A year ago the discount was around -13%.

The income offered by Digital 9, in common with many other alternative asset investment trusts, was a key draw for investors. Therefore, the dividend being seen as less sustainable caused the share price to fall notably. The share price was also punished given that the trust's board had said in mid-July that the dividend policy would remain in place.

A year ago, Digital 9 had a dividend yield of 6.5%. In response to its share price decline, the yield has risen to 18.3%, according to Morningstar via the Association of Investment Companies (AIC).

The board said: “Following careful consideration of the options available to the company and after consultation with its financial advisers, as well as taking into account feedback received from a large number of shareholders and institutional investors, the board has determined that it would be in the best interests of shareholders as a whole to put forward a proposal for a managed wind-down of the company.”

The board added that if granted shareholder approval it “will then endeavour to realise all of the company’s assets in a manner that maximises value to shareholders”.

Charlotte Valeur, interim independent chair of D9, said: “Throughout the strategic review process, the board's primary objective has always been to maximise shareholder value going forward. Having carefully considered a number of options, we have ultimately concluded that a managed wind-down of the company is likely the best route to achieve this objective and seek to address the discount to NAV that impacts our shareholders.”

Interest rate rises have been a headwind

Higher interest rates have been a key part of the story. When interest rates were low, alternative asset sectors such as infrastructure and renewable energy have more appeal among investors due to the high yields on offer, particularly when the safest end of the market, gilts, were yielding next to nothing. 

Moreover, infrastructure was seen as a good inflation hedge, given that funds and investment trusts specialising in this area look to gain exposure to government-backed and inflation-adjusted income.

However, as interest rates and bond yields rose, investors had more options to earn a high yield, particularly among money market funds and bonds, including gilts. Given that investors can earn 5% or more on low-risk assets, there is less incentive to look at higher-risk options such as infrastructure.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.