6th December 2024
The subject of investment trust corporate governance is the gift that keeps on giving. We recently wrote a Crescendo (link here) focussed on the ‘positive changes’ at Keystone (KPC). Since then, the Board of Miton UK Micro Cap Trust (MINI) decided to call it a day after 40% of the shareholder register elected to tender their shares in the latest annual redemption opportunity. The disappearance of MINI follows Downing Strategic Micro-Cap’s (DSM) imminent closure, leaving River Global Micro-Cap (RMMC) as the only pure micro cap mandate in the sector. Whilst Darwinian forces have dictated the future of MINI and DSM, it is a shame because the closed-ended structure is ideal for illiquid asset classes like micro-caps. When (if?) demand picks up for UK small and micro-cap companies, the sole survivor RMMC stands to benefit.
Given the precedents of MINI and KPC, where the respective Boards identified the manager’s equivalent open-ended version as a suitable rollover option, you’d expect others in similar situations to follow. Not so judging by this week’s news from Bellevue Healthcare (BBH). Like MINI, BBH is one of a few trusts to offer shareholders the ability to redeem their entire shareholding every year at NAV less costs. BBH announced this week that it is considering scrapping that annual tender and replacing it with performance related tenders for just 10% of issued share capital, the first of which won’t be until 2028, and a continuation vote in 2030. This will be subject to a shareholder vote but our initial reaction can be described as underwhelming at best.
The 100% annual tender has been a key feature of the trust since it launched in 2016, providing IPO and secondary market backers with confidence of getting their money back at very close to NAV in the event the discount widened. We think these annual 100% tenders are an effective discount control mechanism especially when the underlying assets are liquid enough. Further, it gives long term shareholders comfort that the discount shouldn’t get too wide for two reasons. First, the Board and manager should do everything in their power to maintain a narrow discount, including increased marketing, improve performance (easier said than done of course!) and share buybacks to bring the supply and demand of shares into balance. Second, if the discount persists shorter term shareholders will step in and take the opportunity to buy on a wide discount knowing there will be the ability to tender at NAV within the next 12 months. The BBH statement alludes to those short term ‘value’ investors causing the problem but if the arbitrage opportunity presents itself, why wouldn’t they? We see nothing wrong with such investors appearing on registers – they are an essential part of the investment trust ecosystem.
Having these annual tenders allows regular feedback as to a trust’s relevancy. It is not surprising given recent material underperformance that over the last two years, more than half the number of shares in issue has elected to tender. That alone sends a powerful message as to what shareholders think of the mandate. As managers of daily dealing open-ended funds will testify, we live and die by performance and relevancy on a daily basis, so having an annual exit opportunity might be considered a luxury! It will therefore be interesting to see how remaining shareholders vote on the attempt to amend the terms of the tender and extend the mandate to 2030.
We are not currently shareholders of BBH so haven’t been part of any shareholder consultations but wonder what other options were considered by the Board. An immediate continuation vote given the drastic changes rather than introducing one in 2030 seems essential, especially given the managers have had 8 years to prove their credentials. What about a merger with a similarly mandated healthcare trust which all trade on discounts, perhaps due to none achieving the scale required by the new, much bigger constituency of buyers today? We’ve seen various fund mergers this year that have been well received. What about a change of manager after a period of poor performance, which is commonplace in the sector. JP Morgan European Discovery recently changed their manager after a period of underperformance. Or, the most obvious solution, is to follow recent precedents and offer a rollover option into Bellevue’s equivalent open-ended fund for shareholders that still believe in the manager and mandate. Or what’s wrong with maintaining the status quo? A trust with assets of £400m is of sufficient size to attract new buyers when sentiment towards the trust improves. The Board said that increasing ongoing charges caused by a shrinking trust was a reason to act now to arrest the decline, but was a reduction in the management fee or switching it to be based off market cap considered?
We accept that managers’ styles and processes go through periods of good and poor performance – no manager has solved investment! That’s why we like the shareholder friendly terms of the regular tenders or other backstops to prevent trusts languishing on wide discounts and to let shareholders vote with their feet if they want.
Daniel Lockyer – Senior Fund Manager
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