Since the implementation of the Retail Distribution Review (RDR), investment trusts have come under the scrutiny of a broader audience—and rightly so. As a result, some boards have been proactive in trying to make their funds more attractive for existing and potential shareholders alike.
Boards are now prepared to take more action regarding the management of discounts
One trend we have been seeing is stock splits. Over the last five years, 16 funds have sub-divided their shares, with nine of those happening in 2014 alone.
A key argument in favour of stock-splits is that it keeps the share price ‘attractive’ to individual investors. There’s a psychological argument to say some investors feel they are getting more for their money if £1,000 buys them 100 shares rather than just three or four. Further, it could be said that a very high share price can be a deterrent. Personal Assets investment trust (PNL), for example, has a very high share price—a single share costs well over £300.
That has helped to keep the shareholder-base wide; to deter individual shareholders from exerting too much influence; and to provide a long-term, retentive shareholder-base. Indeed, retail shareholders tend to focus on selecting good managers and will stick with them throughout; professional investors aim to add value through asset allocation and investment selection and thus will rebalance their portfolios more often.
The opposing argument is that stock-splits create unnecessary costs and that funds, such as Personal Assets, attract investors who are willing to pay for quality and therefore the number of shares an investor can purchase with their cash amount is largely irrelevant.
We can see the merits of both sides of the argument and think there is no right or wrong approach; more importantly, what we find encouraging is that the topic is now on boards’ agendas and that not only these boards are open to change, but they are recognising the changing marketplace and the need to adapt.
We also like the fact that boards are now prepared to take more action regarding the management of discounts. Discounts and premiums are a double-edged sword: discounts can create opportunities and provide an attractive entry point for new investors, but they can also create additional volatility around the fund’s NAV.
It is this volatility that puts some investors off from buying investment trusts. Granted, the average investment trust’s discount has narrowed down considerably over the last decade, and more recently, this has been caused by improving market sentiment. Over the longer term, we believe it’s a function of improved transparency and more pressure being placed on boards to buy back and issue shares to address supply and demand imbalances.
Some boards have taken this one step further and implemented a zero-discount policy. Examples of recent adopters of this include Martin Currie Global Portfolio (MNP) and Jupiter Green (JGC); while a zero-discount policy requires boards to be more proactive with buybacks, there is also a psychological effect that keeps the discount tighter and less volatile, with the added knowledge that the board is absolutely committed to taking action to eliminate any deviation from NAV.
We are also encouraged by the simplification of fee structures. Investment trusts have historically benefited from a structural advantage given their lower fee levels, driven by the absence of trail commission payments to advisers. So the discussion would rarely go beyond the headline figure at a board level.
Nonetheless some funds have performance fees which, if structured poorly, erode that competitive advantage; further, some have overly-complex fee structures, such as tiering based on the level of assets.
While not necessarily wrong, such arrangements are overly complicated, particularly when they apply to a plain-vanilla equity fund. The introduction of clean share classes for open-end funds means the differential in fee levels is no longer in trusts’ favour and hence some boards have not only renegotiated lower annual management fees with their investment manager, but also simplified the fee structure. Schroder Income Growth (SCF) is the most recent fund to do this.
One could argue that the structural advantages offered by a closed-end fund are being used to a greater extent these days, too. Out of 15 new fund launches so far this year, 12 are highly specialised: VCT funds, distressed debt, direct properties, unlisted infrastructure etc.
The investing spectrum of these mandates differs widely, but what they each have in common is that they invest in niche, illiquid areas, which can only be managed through a fixed capital base with no cashflow issues to deal with. Arguably two of the three more traditional funds—Fundsmith Emerging Equities Trust (FEET) and Diverse Income Trust (DITC) – can also benefit from the fixed asset-pool. The former invests in emerging markets, a sector which also requires a long investment-horizon, the latter in small-cap stocks which can be illiquid. Their investment trust status means they can retain part of the income they receive from their underlying companies and save it for leaner years to smooth dividend payments.
Indeed, boards have been proactive with their dividend payments and we’ve seen several move to quarterly dividends to offer a more regular source of income to shareholders. This doesn’t mean an increase in the dividend payment itself, but it does mean that in addition to reliable dividends—Brunner, for example, is amongst the ‘Dividend Heroes’ that has a 40-year record of consecutive dividend increases—they now can provide for a more frequent cash flow, which has appeal for income-seekers.
These changes aren’t huge, but they’re important ones and show that the boards are willing to move on from the past. We still meet boards that are resistant to change, but we’re working hard to shift this mindset and show that a small change can make a big difference.
