14th April 2023
Just when we thought the investment trust sector couldn’t get kicked again, news of the Investec / Rathbones deal hit the wires. These two are the largest owners of investment trusts in the country and we’re sure you will have seen commentary on some of the trusts that will have a very large ownership of from the new merged company. The larger a wealth or fund manager is, the greater the liquidity is required from their potential and existing holdings. One of our long-held beliefs is that size is always a constraint on performance – no matter what kind of investor you are. In the case of wealth managers, the larger the size, the smaller the potential pool of investment trusts (or any fund for that matter) that might be considered for client holdings. Regardless of any other costs or benefits, the merger between Investec and Rathbones will surely limit further the number of investment trusts this new asset management giant can invest in.
Is this a good thing? We will resist wading any further into the debate of whether the merger is positive for underlying clients but we are certain it isn’t a good thing if you’re a smaller (sub £500m market cap) investment trust. It also isn’t a good thing if you’re trying to launch an investment trust. Indeed, Investec and Rathbones have been important cornerstone investors on several investment trust IPOs over the years, but the new combined size and aforementioned liquidity requirements will likely mean the target raise size they consider increasing materially, reducing the probability of a successful launch and dampening the number of interesting new investment opportunities that make it to market. The investment trust sector in recent years has been at the forefront of making previously hard to access alternative, real assets available to retail investors. The Investec-Rathbones merger will not help sustain this trend. Looking beyond just the primary market, the ceaseless consolidation of the wealth management sector presents a huge challenge for the investment trust sector more broadly. How on earth does it stay relevant when an increasing proportion of this country’s wealth is managed by ever larger companies – often with centralised investment propositions that require ever larger minimum market caps and levels of daily liquidity of potential investee funds.
The challenge must be recognised by Boards, brokers and investors alike. Our own investment process now has even more emphasis on the shareholder register. Before we invest in an investment trust, we want to know if there are any wealth management firms on the register that may be forced to disinvest due to size constraints – or indeed other commercial considerations. In the wake of the cost disclosure issues we have campaigned on, considerations unrelated to investment merits are playing an ever bigger role in whether a trust will prove to be a profitable investment.
If the investment trust sector is going to be negatively impacted by industry consolidation, then discounts will become more commonplace, wider and harder to eradicate. In turn, this means it is more important than ever that investors engage with Boards to stop these discounts from becoming entrenched. Too many investors in the sector never bother to engage with Boards. This is not good enough. I would urge all clients to ask questions of their wealth manager as to their level of engagement with investment trust Boards.
Finally, we would like to see a more active market for corporate control. If the value of assets held by investment trusts are worth their carrying value, a wide enough discount should attract takeover approaches. Why we do not see more of this activity is often put down to the “poison pill” that a long-duration management contract often creates – one of the ‘Achilles heels’ of the externally-managed trust structure. All stakeholders must be realistic about the challenges the sector faces. Increased shareholder protections must be considered given these new and strongly-blowing structural headwinds.
Ben Conway – Head of Fund Management
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