These stock market listed investment companies now operate in a wide range of sectors. Their shareholders range from the smallest private investors through children’s savings schemes to large institutions. They are overseen by boards of directors that are typically independent, with the power to appoint, evaluate and change fund managers.
Unlike conventional funds where the value of a share is a direct reflection of the portfolio held, investment trust share prices reflect investor demand that ebbs and flows and won’t always fully reflect the true value of the underlying holdings. In recent times, many trusts have seen their shares languish at discounts to the value of the assets they own. In part this reflects the wider pattern of investors moving cash out of the UK stock market into the US.
History suggests that buying trust shares at wide discounts represents a big opportunity for patient investors prepared to wait for them to narrow. But periodically, discounts have also come to the attention of activist investors with the firepower to take stakes and use these to agitate for change. For example, a campaign led by Elliott Advisers in 2016 resulted in an overhaul of Dundee-based Alliance Trust. This introduced greater independence between the board and the fund management team and a narrowing of the discount. Last year Alliance merged with rival Witan, resulting in lower fees.
More recently, activists have taken an interest in UK investment trusts again, spying the opportunities presented by discounts and some cases of disappointing short-term performance. In December, US hedge fund Saba Capital launched an audacious campaign by calling shareholder meetings at seven investment trusts in which it had taken stakes. In each case, Saba tabled resolutions to replace the boards with two of their own nominees, switch the management contracts to themselves and change the mandate of each trust to become funds used to take stakes in other investment trusts.
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This has certainly ruffled some feathers, including quite a few in Edinburgh where Baillie Gifford manages three of the trusts targeted. The common threads in the opposition to the proposals from incumbent boards were that the proposed boards would lack independence, the changes in mandates would result in entirely different strategies from those shareholders chose when investing and that by seeking to be appointed as the investment manager Saba was seeking a fee grab.
Most of the trusts targeted had a relatively sizeable proportion of shares in the hands of private and small shareholders, who typically do not vote on shareholder resolutions. By voting its own significant shareholdings in each trust, Saba may have hoped its own votes would be sufficient to succeed if large numbers of smaller shareholders failed to vote.
The last week proved to be a crunch time for most of the trusts targeted. Shareholders in Henderson Opportunities, CQS Natural Resources Growth & Income, Baillie Gifford US Growth, Keystone Positive Change and The European Smaller Companies Trust all overwhelmingly rejected Saba’s resolutions, following in the footsteps of a similar result at Herald Investment Trust last month. Shareholders in Edinburgh Worldwide are set to vote on February 14.
While the incumbent boards may breathe a sigh of relief, it is no time for complacency. Saba’s proposals were considered unconvincing, but many trusts across the industry need to do more to narrow discounts. It remains to be seen what Saba’s next move will be, but either way, there is every possibility that other activists could come along if the underlying issue of discounts isn’t addressed.
It is important to note that some trusts smelt the coffee long before this recent debacle: Scottish Mortgage, the FTSE 100 listed giant, bought over £1 billion of its shares last year. Others need to do more, whether through regularly buying back their shares or launching tender offers to enable investors who wish to exit to do so at valuations close to the underlying value of the portfolio.
There are also too many small trusts which struggle to attract larger, institutional investors. And there is little hope of them raising additional capital through new share issues when discounts are the order of the day. More mergers between trusts with similar mandates, as we have started to see, would be healthy. Trusts should also step up efforts to better engage with private investors through advertising and marketing, as well as encourage consistent share buying through regular savings schemes.
Amid the very public criticism trusts have had to address of late, investors contemplating options for their ISAs and pensions before the end of the tax year, might consider taking advantage of the discounts available. With the increased intensity on boards to tackle discounts, these may well start to narrow.
Investment trusts were instrumental in democratising global investing, a role that remains relevant today. Recent weeks have shown that when the chips are down, individual shareholders can be motivated to have a say in how their investment company is managed. So, who is to say we are not seeing the early shoots of a new era for investment trusts?
Jason Hollands is a managing director at wealth manager Evelyn Partners, which has offices in Glasgow, Edinburgh, and Aberdeen.
