Part 5: Relevance & Communication
28th July 2023
In part 1 of this series, we referred to a number of reasons why we think the average discount of the investment trust sector is at a historic wide level today, and the common theme is the deteriorating relevance of investment trusts in a new paradigm for the UK wealth and fund management community. The cost disclosure regime for investment trusts (we’ve written enough on it so we wont repeat ourselves here), together with the new ‘Fair Value Assessment’ requirement, without which some wealth managers won’t invest in investment trusts, means investment trusts get put on the ‘too expensive’ or ‘why bother’ pile. Why invest in ‘expensive’ investment trusts for private client portfolios or IA listed funds if it makes the client’s or fund’s overall OCF so high compared to investing in zero OCF operating companies or ultra-low OCF passive funds? It is hard for many firms to justify owning assets that make their own proposition look expensive, and therefore uncompetitive, even if they believe that investment outcomes would be better.
At the same time, the consolidation of the UK wealth management industry gathers pace causing ever larger firms’ buy lists to focus only on the largest and most liquid investment trusts and equities so they can be bought across as many suitable clients’ portfolios as possible. The process of selling ‘expensive’ or small and illiquid trusts from funds and portfolios, has been exacerbated by the cyclical issue of there being plenty of attractively valued vanilla assets, such as government and corporate bonds for investors to choose instead for the first time in more than a decade. This resulting imbalance of supply and demand has pushed the discounts to the current wide level. While there is hope that the authorities will reverse their guidance on the OCF issue, we fear the wealth management consolidation trend and the consequential abandonment of large swathes of the UK equity market, of which the investment trust sector is a significant part, is here to stay. This means all investment trust stakeholders must do something about persistent discounts now, particularly the smallest trusts where the relevance problem is more acute. The Boards of all trusts have a big challenge on their hands. Questions to ask themselves, or for shareholders to ask them, include:
- Is their trust relevant today? If the discount remains wide no matter how many share buybacks or marketing efforts undertaken, that surely signals a permanent imbalance of supply and demand?
- is the mandate making the full use of the closed-ended structure investment trusts offer or can it be replicated in an open-ended fund?
- are the terms and structure of the trust relevant compared to more recently launched trusts with better discount protection measures?
- if their trust didn’t exist today, would they seek to IPO it?
If the answer to any of those questions is “no”, then it simply should not exist. Boards, brokers, managers and shareholders should proactively seek to merge it with a larger vehicle not necessarily one with the same asset class, change the manager or mandate to a more relevant style or asset class, aggressively seek to narrow the discount through tenders or buybacks (being prepared to shrink first in order to grow later), or just wind the trust up and give shareholders their money back. Recently the Boards of some abrdn managed trusts have clearly considered these issues and been at the forefront of the nascent consolidation trend with the merger of abrdn New Dawn and Asia Dragon trusts, the merger of abrdn Japan with Nippon Active Value, the liquidation of abrdn Latin America and the merger of abrn UK Smaller Companies Income and Shires Income. Those directors, and abrdn, should be applauded, as they set the benchmarks for others to follow – sometimes turkeys do vote for Christmas!
If the answer to the above questions is “yes” then Boards and management teams need to consider how they are engaging and communicating with their target audience if they want to get the shares to a premium rating and be able to grow. Unfortunately, there is no silver bullet here and simply switching brokers or engaging with third party paid-for research organisations isn’t enough. Alongside those initiatives, there needs to be a determination to improve the level and consistency of disclosure and transparency of the underlying assets and valuation processes, particularly for some of the immature alternative asset classes. It is essential to ensure investment trusts are not viewed as more complicated than conventional investment options. A relentless public relations campaign with efforts to build relationships with journalists and platforms is one way of raising a trust’s profile, especially among the retail investor, whose share of the investment trust ownership is steadily rising such that they now own 67% of the conventional equity investment trusts and 25% of the alternatives (thanks Winterfloods for those stats). The retail investor is the ideal buyer of investment trusts given the origins of the sector. In 1868, the first investment trust, Foreign & Colonial Trust, was launched to provide “the investor of moderate means the same advantage as the large capitalist”, i.e. democratise illiquid asset classes that would otherwise be unavailable to most investors. All those alternative asset classes such as the various sub-sectors of property, infrastructure, song royalties, shipping and private equity provide diversification benefits beyond just mainstream equities and bonds for all investors, not just the largest and wealthiest.
In providing all investors access to asset classes and management styles that cannot or should not be replicated in open-ended form, we believe the investment trust sector as a whole is still as relevant today as it was in 1868, and even more so in light of the advent of Long-Term Asset Funds (LTAFs), the questionable invention of an open-ended fund investing in illiquid assets but with long term lock-ups and limited dealing windows. Surely investment trusts will deliver better investment outcomes than LTAFs? After all they’ve got over 150 years’ experience. Perhaps the providers of LTAFs are sensing an opportunity because of the breakdown of the relationship of NAV performance of investment trusts and shareholder experience, i.e. the widening of the discount over recent years. It may also be because the IFA community finds it easier to understand and invest in LTAFs than investment trusts where only the biggest trusts are liquid enough to be listed on the main IFA platforms. This reinforces the lack of relevancy among a huge constituency of potential trust buyers.
As we have said before, the process for investment trusts to recover and be more relevant in today’s environment is like most things in life – it can only start with an acknowledgment of the problem. We will continue to press home the message to Boards, managers and brokers but, just like the recent abrdn announcements, we need proactive measures too. .
From left to right: Ben Mackie, Ben Conway, Daniel Lockyer, Dan Cartridge
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