Hargreaves Lansdown co-founder Peter Hargreaves famously upset the investment trust sector back in 2010 when he commented that it was “run by a lot of fuddy duddies who have no place in the industry”. Yet while some recent developments in the closed-end space seem more soap opera than ‘fuddy duddy’, they may also point to a sector that is more willing to take action on sub-par or non-performing investment mandates than its open-ended counterparts.
Hawksmoor Investment Management has recently written an excellent series of articles under the umbrella heading ‘We need to talk about investment trusts’. While fundamentally concerned with the problem of widening discounts, wealth manager consolidation (leading to ever more centralised buy lists) and retaining relevance in a crowded market, one of the Hawksmoor team’s observations was that “strong boards are also required in representing shareholder interests and in making investment advisors [sic] aware there is no such thing as permanent capital”.
Two pieces of news in the past week point to the timeliness of this statement. First, the Home Reit saga rumbles on: with the shares still suspended, the annual results to 31 August 2022 still unpublished, only 7% of rent collected in May and June, and two more tenants having gone into liquidation, the trust has proposed to effectively abandon its social housing mandate – at least for the next two years – in an attempt to squeeze some value out of its assets as it seeks to ‘stabilise’ under new investment manager AEW.
However, these proposals are subject to shareholder approval at a general meeting on 21 August, and while many of Home’s shareholders (including those involved in a compensation claim against the company) have expressed disgruntlement at the slow progress so far, the board has stated that AEW’s appointment is contingent on the proposals being passed. If they are not, there may be little choice but to wind up the company, crystallising large losses for the holders who in less than three years had pumped £853m into the IPO and subsequent fundraisings of a trust with the laudable aim of helping to tackle the UK’s homelessness problem.
Another trust whose shares remain suspended amid acrimony is ThomasLloyd Energy Impact (TLEI), also a relatively recent (December 2021) IPO promising social benefits, this time through the provision of sustainable energy infrastructure in the developing economies of Asia. Trading in the shares was halted in April after it emerged an Indian solar park being constructed by manager ThomasLloyd had become financially unviable due to construction overruns leading to hefty non-completion penalties.
A continuation vote was due to be held at the 30 June AGM, based on a provision in the IPO prospectus requiring such a vote “if it had not invested, or committed to invest, at least 75% of the net initial proceeds raised at IPO within 12 months of admission to listing and trading”. TLEI’s board had sought to delay the vote, given the late publication of the annual results caused by uncertainty over the portfolio valuation. However, a general meeting and vote was requisitioned by shareholders in the trust via other ThomasLloyd-managed vehicles.
While Hawksmoor views the presence of continuation votes and redemption pools as indicative of good corporate governance in trusts investing in less liquid assets, noting that “we believe all new trusts should include [such] features but also think existing trusts should embrace them as a matter of course”, TLEI’s board had argued that a lack of clarity around the trust’s financial position meant that a continuation vote was a ‘distraction’ which was unlikely to be in most shareholders’ best interests.
However, in a statement published on Monday, the board hit out at the investment manager, which it said had failed to deliver a plan for the potential relaunch of the company, as well as launching only an internal investigation into the failure of the Indian project, a process from which TLEI itself was excluded. Owing to a loss of confidence in the investment manager, the board has now recommended voting against continuation at the general meeting scheduled for 24 August 2023, stating that it does “not believe that it would be prudent to vote in favour of the continuation resolution where the future direction and prospective financial returns of the company are unclear”.
This announcement included the following reminder: “If the continuation resolution is not passed, the company will be entitled to terminate its investment management agreement with the investment manager summarily at any time and without further payment in respect of the investment manager’s initial five-year term of appointment.”
This sparked a retaliation from ThomasLloyd, which branded TLEI’s board “self-serving” and said its actions in recommending a vote against continuation “are fundamentally detrimental to shareholder value and to the best interests of shareholders”.
However, analysts at Winterflood were “particularly surprised to see the manager label the board as ‘self-serving’ given that the directors recommended shareholders vote against continuation, which would necessarily sacrifice their fees,” adding that they “would not be surprised to see shareholders vote for a wind-up given the events of the past month”. Indeed, it is arguable that in seeking to continue to run the portfolio, the investment manager’s intentions are rather more ‘self-serving’ than those of the board.
Pointing to a recent spate of investment trust mergers and liquidations – particularly within the Abrdn stable, where boards “have clearly considered these issues and been at the forefront of the nascent consolidation” – the Hawksmoor team noted that “sometimes turkeys do vote for Christmas”. They concluded: “Underlying everything must be the recognition that success (defined as an investment trust trading at a premium for at least some of the time) is only possible if boards are willing to contemplate shrinking or even fully liquidating. If not, the sector is in danger of becoming a place where the only stakeholders not riding the gravy train are the shareholders.”
While this warning may prove to be unnecessarily stark, it is certainly something for all those involved in managing and governing investment trusts to bear in mind.