The AIC has issued a video which spells out some of the advantages of investment trusts over open-ended funds. They spell out that with most investment products you don’t have a say, but with investment trusts you do because you can vote on important decisions about how your company is run and what it invests in. You can also attend the Annual General Meeting (AGM) to meet, and question, the board directors and the investment manager. Investment companies also have independent boards of directors.
You may think that all of this is theoretical and in practice shareholders have little influence. But that is not the case. When push comes to shove, shareholders can change the fund manager and even the board of directors. I have been involved in several campaigns where this actually happened – not just in smaller companies such as in VCTs but at Alliance Trust. The outcome is usually positive even if a revolution does not actually take place.
But attending AGMs is now only available as an on-line seminar using various technologies. I have attended several in the last few weeks of that nature, and they are less than perfect in some regards. Technology is not always reliable and follow up questions often impossible. But they do save a lot of time in attending a physical meeting and they are certainly better than nothing. I look forward to when AGM events can return in a “hybrid” form where you can attend in person or via a webinar.
The AIC video is available from here: https://www.theaic.co.uk/aic/news/videos/your-investment-company-having-your-say
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
I have invested in a few Investment Trusts, and now that I get ‘news’ from the LSE on anything my companies have to report on, I am surprised that these Trusts buy in shares for cancellation or Treasury almost every day. On enquiry I understand that the percentage they can buy in is approved at each AGM for the following year and that figure cannot exceed 15%. This is done to help reduce any discount between the share price and NAS. One Trust admits that if they continue to buy in 10% of the issued share capital for ten years or less it would have odd consequences. They failed to answer “Surely you could do what you are meant to do and invest in companies who grow and prosper.” One said that “they are not like a trading company who should use spare cash to invest in assets to grow the company or pay the cash out as dividends”.
Any thoughts anyone?
You are quite right, Mark. There is a balance to be struck when a trust makes buybacks. On the one hand, they increase NAV per share, when a trust is trading at an excessive discount to NAV and may help close the discount gap. On the other hand, they shrink the trust. For a small trust that may be an issue, because the manager’s costs are then spread across a smaller number of shares, which may make the ongoing charges % higher (for any fixed cost element). Less likely to be problematic for a large trust, where buybacks don’t have a big impact.
For example, Blackrock World Mining tends to have a volatile discount, which sometimes widens to an an unreasonably large level (> 15%). As that trust has a £700m market cap. and the trust buys back shares judiciously, I am happy to support the board in doing this. Where shareholders know that such a policy is in place, they can be confident that if they need to sell shares at some future point, they won’t have to do so at an excessive discount to NAV. For trusts without such a policy in place, there is much less certainty about what price can be realised should the shareholder need or wish to sell.
Nevertheless, a consistently good trust performance (and good investor relations to make sure the qualities of the investment company are understood by the market) is a better protection against excessive discounts than buybacks!
In summary, you need to decide on a case by case basis whether you support a buyback policy – and make the board aware of your views.