Investment trust takeovers are nothing new, but this week’s fiery presentation from activist investor Saba Capital founder Boaz Weinstein was the type of impassioned rhetoric that investors don’t often get to hear. In an attempt to take control of what he calls “the miserable seven” UK investment trusts, the US hedge fund manager — who has declared himself the “voice of mom and pop investors” — laid into “the boys club” and the “ecosystem of greed”.
Saba, which owns 19-29 per cent of shares in each trust, is seeking to fire the boards, combine the trusts into a larger vehicle, be the manager and appoint the new directors. ShareSoc, which represents the interests of retail investors, called the plans “incestuous and self-interested”.
But even as the invective reached new levels, the fundamental arguments have been levelled at the industry by ordinary investors for years — it just seems like no one has been listening: or, if they have, they haven’t done enough about it.
Across the industry, discounts to net asset value have been far too wide for far too long — finally, the elephant in the room seems to have blown its trunk. For years, there has been an uncomfortable question about how far investment trust boards really protect the interests of the retail investors. Independent boards are often touted as one of the advantages of the investment trust structure, seen as a key shareholder protection. But is that right?
Boards have tools such as share buybacks at their disposal to reduce discounts. Some boards have acted — though perhaps they’ve not done enough — while others haven’t. Did they really have retail investors front of mind?
Weinstein singled out one of its targets, Herald. This trust’s 20-year stint trading at a discount, despite Katie Potts’ strong reputation as a portfolio manager, has “trapped” investors, which the board had done nothing to tackle until this month, he says.
Another long-standing criticism of investment trust boards is their lack of skin in the game to align them with investors, and a passive approach to governance. Weinstein’s rhetoric is strong, but you don’t have to look far to find similar concerns elsewhere: both of these issues a boardroom bust-up in 2023 at one of the best known and popular investment trusts, Scottish Mortgage.
Wealth manager Quilter Cheviot examined board effectiveness in September of that year, followed up by a second report last summer. It highlighted that board composition was the biggest problem area, with the greatest number of red ratings. The most common reasons for these were failure to meet diversity targets, the presence of non-independent directors, or one or more directors serving beyond the recommended tenure of nine years with no plans to resolve this.
There have been improvements on diversity. And Covid-19 made shareholder webinars more prevalent, enabling greater retail investor attendance. But both of those improvements feel somewhat forced — the Financial Conduct Authority has diversity targets, after all.
Doug Brodie, chief executive of Chancery Lane, a retirement income adviser, says: “We have many directors on boards who are out of their depth, doing nothing more than rubber stamping reports and acting as each other’s committee chairs. Lengthy, out of date or irrelevant City CVs have failed the trust investors. And it gets worse when you see the same CVs on board after board after board.” He found someone who was on nine IT boards.
Shareholders will soon have the final say on whether Saba carries the day. The first voting deadline, for Herald, passed yesterday. Five trusts — Baillie Gifford US Growth Trust, CQS Natural Resources Growth & Income, European Smaller Companies Trust, Henderson Opportunities Trust, and Keystone Positive Change Investment Trust — have deadlines at the end of the month, while Edinburgh Worldwide has yet to announce the date.
The affected trusts have thousands of private investors. If they act together their voice could carry more weight than Saba’s large shareholdings.
One question that remains, though — and this isn’t talked about enough — is whether retail investors will vote in the required numbers. The industry doesn’t make voting easy enough or promote it well enough to often busy people who have other demands on their time.
Most retail investors hold their investment company shares on platforms. If this applies to you, your platform needs to help you vote your shares. Unfortunately, most platforms can’t facilitate voting with any great ease.
One reader contacted FT Money to say: “I spent 33 minutes today trying to vote my shares via Halifax Share Dealing. There’s no notification on my account about any corporate actions or votes. This is just wrong.” Halifax Share Dealing’s terms and conditions state it will attempt to help customers vote by proxy, but also says it will only do what it terms “reasonably acceptable”.
A few platforms are trying to make voting easier, having struck up a partnership with fintech Broadridge. Others, such as Interactive Investor, AJ Bell and Hargreaves Lansdown, also do a good job of informing customers about voting issues. Even so, there is far too much friction in the process for voting to be widespread. Anyone who attempts to vote also has to navigate the cumbersome language used in resolutions.
It’s unacceptable and the position enables opportunists like Saba. So it’s time the regulator confronted it.
The Association of Investment Companies cites Consumer Duty, which requires platforms to help customers make informed decisions about their investments by ensuring they have the information they need at the right time, in a way they can understand.
Another often-ignored problem is that investment trusts badly need new investors but are hardly rushing to improve their promotions or communications. Few are targeting current or prospective shareholders effectively on social media, for example. And the industry is woefully bad at investing in public relations, although the current saga has spurred the affected trusts into PR crisis action.
Maybe the “Saba-rattling”, as some are putting it, could be a much-needed stimulus?
Analysts at Peel Hunt expect it to encourage boards of other investment companies to take proactive steps to narrow their own discounts. All seven of the trusts Saba is currently targeting have seen their discounts narrow from their 12-month averages.
Could investors get ahead by selectively buying 17 other trusts in which Saba has publicly disclosed positions? Some of the best-known are Lowland, Schroder UK Mid Cap, BlackRock Smaller Companies, Fidelity Emerging Markets and Impax Environmental Markets. Peel Hunt believes there is likely to be pressure on these trust’s discounts to narrow — either as part of a potential activism campaign, or as the company seeks to fend off such an approach.
It may be a buying opportunity, but I would tread very carefully. Before buying an investment trust it pays not only to look at performance but also the composition of the board. Is it independent of the investment manager, and are their decisions truly on your side? Some questions are harder to answer than others.
Moira O’Neill is a freelance money and investment writer. She owns shares in Scottish Mortgage Investment Trust. Email: moira.o’neill@ft.com, X: @MoiraONeill, Instagram @MoiraOnMoney
