This week sees the potential demise of another investment trust, Aquila Energy Efficiency Trust (AEET), after 55% of shareholders failed to back a continuation vote.
AEET debuted on the London Stock Exchange in June 2021, and had only recently announced the full investment of its £98m launch proceeds. Yet despite its ESG-friendly objectives and 6%-plus dividend yield, it has failed to capture investor imagination to the same extent as its rival SDCL Energy Efficiency Income, launched only three years earlier but now boasting total assets of almost £1.2bn.
The trust’s board now has six months in which to “explore all options” and decide whether AEET will be reconstructed, reorganised or placed into liquidation.
Some 45% of respondents surveyed by investment trust broker Winterflood at its annual conference in January said more investment trusts should actively pursue consolidation, as the sector contains too many small, illiquid funds. However, while one-third of those surveyed said they would not consider investing in a sub-£100m investment trust, one respondent commented that “small funds have a place if they offer something different and niche”.
Arguably, ‘something different and niche’ is exactly what is offered by the £60m Abrdn Smaller Companies Income (ASCI), a rare closed-ended example of an income-focused smaller companies fund, whose board last month announced that it was considering a merger or liquidation in light of the trust’s small size and persistent discount to NAV.
Yet as Simon Crinage, head of investment trusts at JP Morgan Asset Management, points out, while a fund manager may have a view on the desirability of maintaining exposure to an out-of-favour asset class where there are limited alternative options for investors, the board of an investment trust is answerable to its shareholders, who tend to have the final say on whether to call it a day.
The JPMAM investment trust stable – among the largest in the UK – currently has only one sub-£100m offering, partly as a result of a fairly active period of consolidation and liquidation, which saw the winding up of:
- – JPMorgan Senior Secured Loan in 2016,
- – JPMorgan Global Convertibles Income in 2019,
- – JPMorgan Brazil in late 2020
It also saw the rollover of JPMorgan Income & Capital into the newly launched JPMorgan Multi-Asset Trust in 2018. More recently, the JPMorgan Global Growth & Income trust has swallowed up both its stablemate JPMorgan Elect and rival The Scottish Investment Trust, boosting its assets to nearly £1.6bn.
“We have been active for a number of years where trusts have been sub-scale or where they have failed to deliver on their objectives for investors,” says Crinage. “You need to have a strategy that is fit for purpose and has the support of shareholders, and that is what has driven these situations for us and also what is driving those in the wider market today.”
He notes that there is still a large number of investment trusts and a large number of investment trust managers, some of which may lack the scale and resource to continue in an increasingly competitive environment. “Where there have been mergers, it has tended to be into larger, more liquid vehicles with better-resourced managers,” he says. A recent example of this is the merger of Independent Investment Trust (IIT) into the Baillie Gifford-run Monks, following the retirement of IIT’s long-standing manager Max Ward.
In the case of IIT, almost three-quarters of shareholders participated in the rollover, with the remainder taking a cash exit. The ability to present such options to shareholders – and to do so publicly – has helped propel investment trust mergers and liquidations into the spotlight, but it is also illustrative of the benefits of enfranchisement. While ASCI shareholders are likely to have a final say on what – if anything – eventually happens to the trust, investors in some of Abrdn’s MyFolio Monthly Income Oeic subfunds recently received letters simply informing them of the sub-scale funds’ impending liquidation.
Winterflood’s analysts broadly see consolidation as a force for good, commenting that “more boards should consider the benefits of mergers, particularly where natural synergies exist, such as the same investment manager or investment approach”, and adding that while they do not expect to see “a wave of merger proposals”, they believe that the sector would benefit from the trend of the last few years continuing.
Crinage agrees on this last point, adding that boards are now much more aware of the need for their trusts to remain relevant and compelling for investors. “The pace of activity has picked up, and I think it will continue,” he says. “Fundamentally, trusts need the support of their shareholders. It’s not just about whether they score highly in an assessment of value or even if they are performing well; it comes down to whether they can continue in their current form or if the board needs to take some sort of action.”