02 Mar 2011 | James Budden

It is all about you - the shareholder 

In a world where Banks and Big Business are lambasted for doing it for themselves rather than their shareholders, investment trusts offer a tangible alignment of interests attractive and transparent to investors. The manager manages the assets and reports to the Board and the Board reports to the shareholders and represents their interests. Company law governs the relationships and shareholders are welcome to have their say individually or as part of interested parties. EGMs and AGMs offer a platform and outside of that no one is more than an email away. Quite often both the managers and the directors will be significant investors in a trust further strengthening the batting on behalf of the shareholders. It is a system that works well despite the occasional unfounded cat call of cronyism or fuddy duddyism from onlookers. Followers of the sector often enjoy seeing people-power at work.

At the moment the biggest trust of them all, Alliance, is under attack from an activist shareholder named Laxey who hold a stake of 1.5% in the Trust. Laxey are agitated because Alliance have shown reluctance in using share buybacks as a way of managing the discount which is considerably wider than its peers. Also they object to an ingenious system whereby the Board may vote on behalf of private shareholders who ignore the call to action. They simply gross up the opinion of the investors within their saving schemes who do exercise their rights. Laxey don’t like this as smaller investors tend to back the Board. It will be interesting to see what shareholders think about this at the upcoming AGM. The discount and share buyback issue is a thorny one for the Board.

Other trusts such as Witan and F&C have rigid buyback programmes which have proved successful in managing the discount within a narrow range. Consequently they have each bought back around 25-30% of share capital over the past few years. But this has enhanced NAV (net asset value) for remaining investors and not really impacted on the TER (total expense ratio) as performance has roughly matched the outflow. Alliance does not wish to follow this example although is has made some small repurchases post the Laxey intervention. TER cannot be an excuse with a trust with a market cap of over £2.3bn. So the questions remain as to why shareholders sit 5% adrift of comparable trusts and would a formal buyback programme restore this value? Thanks to Laxey they will soon be able to express their opinions.

Another old name of the industry, Electric and General, has been in the news lately. A couple of months ago the Board seemed to throw in the towel announcing that the £326m trust would wind up after well over 100 years in business. Initially no comparable alternative was offered to those shareholders wanting to remain invested in the sector which appeared odd at the time. Recently the Board revised its solution by announcing that E&G would become an open ended fund managed by the current manager. A kind of strange take it or leave it solution which has not found favour with one particular shareholder Cayenne – another Laxey perhaps? On a less contentious note Anglo & Overseas are to merge with Edinburgh Partners Global Opportunities which both being managed by the same firm and both being global funds makes a deal of sense and should find favour with investors as indeed do most reconstructions. However the exceptions can prove fascinating to the impartial.