13th September 2024
Last year, during the depths of the investment trust sector’s discount trough, we commented that more corporate activity was needed to stem the relentless outflows and restore confidence in the sector. We opined that a combination of proactive action taken by boards and management, greater shareholder pressure and external M&A activity could all help bring the supply and demand of shares back into balance. It is therefore cheering to see plenty of evidence of heightened corporate activity this year, with the last couple of weeks offering a lovely array of what is possible. These examples should also force the boards of trusts in similar situations to take note and decide whether they should follow suit.
This week, the Board of Keystone Positive Change (KPC) acknowledged that it had failed to live up to expectations since it decided to change the investment policy and appoint Baillie Gifford as manager back in December 2020. With the benefit of hindsight, it proved to be very near the peak of sentiment towards Baillie Gifford’s growth style of investing and the impact/sustainable/ESG strategy. It also, with the benefit of hindsight, proved to be near the trough in sentiment towards UK equity investing with a value style practiced by the previous managers at Invesco. Indeed, a quick look at the relative performance of KPC vs the equivalent open-ended fund managed by the ex Invesco manager, James Goldstone, shows an outperformance of c.67% in the almost 4 years since*. Whilst that decision will go down in history as one of the investment trust sector’s most ill-timed switches of mandate, credit must go to the Board (which has the same Chair as 4 years ago), to have acknowledged that it remains sub-scale at £130m market cap, the discount has been persistently wide and it isn’t as liquid as they would like. Subject to a shareholder consultation, it is considering a roll-over into Baillie Gifford’s open-ended version as well as a cash exit. A board agreeing to wind up and cease to exist is rare and is where the ‘turkeys don’t vote for Christmas’ phrase is always trotted out, but this has to be in shareholder’s best interests because everyone on the register will be able to realise their investment near to NAV or stay in the same strategy in a more liquid, daily-dealing vehicle if they want.
If the board of KPC regards £130m as sub-scale, then, according to a quick scan of Numis’s datasheet, there are about another 50 trusts with relatively liquid underlying portfolios that fit that criterion, so should we expect that part of the sector to witness the greatest level of activity? Well, yes given that two in that list have already acted. Artemis Alpha has agreed to merge with the like-minded Aurora, and Gulf Investments is winding up in response to a massively oversubscribed tender offer. A big thumbs-up to those boards.
It is good to see that mergers and wind-ups are also occurring in the alternatives space. While cash exits are not always as easy due to the illiquid nature of the underlying assets, it is still possible as long as they are structured properly, i.e. don’t just put two unloved and deeply discounted trusts together to make one slightly bigger unloved and deeply discounted trust. Last week we had a flurry of news with the private equity firm Starwood offering cash for Balanced Commercial Property Trust at an 8.7% discount to last net asset value (NAV), Segro looking to acquire Tritax EuroBox using its higher rated shares, and JP Morgan Global Core Real Assets recommending a wind up after a failed continuation vote. We also have a potentially more hostile situation emerging at PRS REIT where shareholders are seeking board changes and a new capital allocation policy. Some of these deals are better than others, with some able to return cash to shareholders quicker, but at least there is some action to deal with the persistent discounts of the trusts involved. Meanwhile, the larger and more mature trusts, such as the core infrastructure names, are aggressively buying back shares, funded by disposals that also serve to validate the NAVs.
Each of our three funds, but Global Opportunities in particular, is well exposed to this improving corporate governance theme. As well as owning conventional risk assets to generate returns, these idiosyncratic opportunities mean we are less reliant on market beta to drive performance, which will come in handy if/when US and global equity markets stop their relentless rise. While we will continue to engage with all boards and managers, the actions of the aforementioned peers are really supportive and set the benchmark for the laggards to follow.
Rather than spoil the positive tone of this Crescendo, we will save the less positive news of disappointing NAVs from Digital 9 Infrastructure, VPC Speciality Lending and Gresham House Energy Storage for next week.
* Invesco UK Equity Income total return +35.7% vs KPC shareholder total return -28.8% ( Source FE Analytics 07/12/2020 to 09/09/2024)
Daniel Lockyer – Senior Fund Manager
For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC24230.
