by ShareSoc Director Cliff Weight. These are my views and not necessarily those of ShareSoc.
Readers may recall my blog in Oct 2020 about investment trusts discounts and what to do about them https://www.sharesoc.org/blog/collective-investments/investment-trust-discounts-what-to-do-about-them-and-sec-example/
On Friday 28 May 2021, SEC announced their new plan to help reduce their discount, https://www.londonstockexchange.com/news-article/SEC/contingent-tender-offers/14995537 :
2022 Contingent Tender
The Board has determined to put in place a contingent tender offer in 2022, should the ordinary shares trade at a wider than average discount of 8 per cent. over the 12 months ending 30 June 2022. In this event, the Board will undertake a tender offer for up to 10 per cent. of the Company’s issued share capital (excluding shares held in treasury) shortly after the 2022 AGM (the “2022 Tender Offer”). The tender price will be equal to a 3 per cent. discount to NAV (less costs) per ordinary share. In the event that shareholders tender in excess of their basic entitlement of 10 per cent., such excess applications will be satisfied on a pro rata basis to the extent that other shareholders tender less than (or none of) their basic entitlement.
2024 Contingent Tender
In addition to the 2022 Tender Offer, the Board has resolved to undertake a further tender offer if, over the three year period ending 30 June 2024, the NAV total return per ordinary share lags the FTSE Small Cap (ex Investment Companies) Index on a total return basis (the “2024 Tender Offer”).
In the event that the 2024 Tender Offer is triggered, the Board will undertake a tender offer for up to 15 per cent. of the issued share capital of the Company (excluding shares held in treasury) shortly after the 2024 AGM at a tender price equal to a 3 per cent. discount to NAV (less costs) per ordinary share. In the event that shareholders tender in excess of their basic entitlement of 15 per cent., such excess applications will be satisfied on a pro rata basis to the extent that other shareholders tender less than (or none of) their basic entitlement.
This follows significant pressure from shareholders and ShareSoc.
This tender offer looks a really good idea. Do we agree and should we be advising other investment trusts with discounts to consider a similar mechanism?
The timescale is interesting. It gives management a chance to turn things around. The share price went up 2.35% on Friday 28th, which is a positive sign. I am told that quite a few of the bigger investors have now sold and there has been quite a turnover of the register, so where the share price and discount will settle is not yet clear.
The averaging period of 12 months to 30 June 2022 is also interesting. The current discount is 13.4 per cent. (as at 26 May 2021, the latest available NAV calculation date), so if the a linear trend down were to occur the discount would have to fall to just under 3% by 30 June 2022 to average at 8%. I think this is a tough target and it is admirable that the board have set such a tough target.
What might happen next?
If the discount narrows to less than 8% (averaged), then there will be no 2022 tender offer and the fund manager will receive their fees on the whole of the fund. The Board will celebrate the success of their discount strategy and dissident shareholders will either shut up or sell up and go away.
I suspect that if the discount continues then all shareholders will seize the chance to sell 10% of their holdings at a 3% discount and that tenders will be scaled back. However it might allow SEC to get rid of some troublesome shareholders at not too expensive a price for the other shareholders to have to subsidise. The fund manager will have a smaller fund to manage and receive less fees (however the fund NAV has grown by quite a lot over the past 6 months so this would more than compensate the fund manager, who would still be receiving larger fees than in the past).
I spoke to the Chairman today and he explained that they have changed their fund manager, administrator and auditor and were now confident for the future.
The tender offer looks like the key shareholders have agreed to let the Board pursue its strategy until at least 2024.
With a new manager (Ken Wotton at Gresham) and a focus in UK small caps (what I regard as a good place to be), the outlook is interesting and the performance over the past months, 1 year and 3 years is excellent.
The directors still have very little skin in the game (i.e own few shares). If they bought more, this would be a sign of their confidence in their strategy.
Should other investment trusts follow this example?
I think any investments trust with a discount will need to seriously look at this case study.
My October 2020 blog highlighted a range of ways to reduce the discount. Tender offers are not the only way, but appear to be a powerful tool in the armoury. A combination of shareholder pressure and an enlightened board willing to embrace new ideas seems to me to be the best approach.
The SEC case study is a good example of what shareholders can do, if they engage pro-actively with management who are also willing to engage. There have been shareholder resolutions and various parties have put their views forward strongly. The progress so far looks positive, but time will tell whether today’s rosy outlook is justified.
Disclaimer: I own shares in SEC and Gresham House.