With Saba Capital having turned the spotlight on a handful of underperforming investment trusts, there is now a wave of activity as other trusts look for ways to reduce the persistent discount to NAV (net asset value) which has dogged the asset class.
Some have introduced ‘discount control’ mechanisms, others have launched share buybacks, and some have announced they will hold a ‘continuation vote’, but what exactly does the latter entail?
WHAT IS A CONTINUATION VOTE?
We wrote about continuation votes just over a year ago in late 2023 in the context of music royalty fund Hipgnosis Songs.
In a nutshell, while most listed companies have an indefinite lifespan, investment trusts – which invest in other stocks or asset classes instead of carrying on a business – have to give shareholders the choice of whether or not to continue trading depending on their circumstances.
Many trusts will have a provision in their Articles of Association allowing for a continuation vote to be held every three or five years at the company’s AGM (annual general meeting).
However, some trusts also have ‘conditional triggers’ which require them to hold a continuation vote if, say, their market value falls below a certain level or the discount to NAV (net asset value) is persistently wide.
If shareholders vote against continuation, the assets are sold, the cash proceeds are returned to shareholders and the company is wound up.
WHY ARE VOTES RELEVANT NOW?
According to the AIC (Association of Investment Companies), investment trusts as a group have traded at double-digit discounts since September 2022, or almost the last two and a half years, which is the longest since 1996.
The second-longest period was between August 1998 and October 2000 (27 months), while the financial crisis saw double-digit discounts persist between September 2008 and September 2010 (25 months).
Excluding the sector’s big beast 3i (III), the current average discount is 14%, which is an improvement on the October 2023 low of 19% but still represents a headwind for investment companies which want to raise funds.
Previous periods of double-digit discounts have ended with those discounts narrowing, contributing to strong returns, as the AIC’s research director Nick Britton points out.
‘Discounts can spell opportunity when it comes to investment trusts. Our research shows that investing at double-digit discounts is generally good for your pocket, and that message has clearly got through to activist investors like Saba.
‘The current period of double-digit discounts has been long, but it can’t last forever. Previous periods like this have ended with some combination of market recovery and corporate activity – and there’s no reason to think this one will be any different.’
WHO IS HAVING A VOTE?
One of the first tests of 2025 comes on 24 March when Herald Investment Trust (HRI) holds a continuation vote at its AGM.
Herald, one of the trusts targeted by US activist hedge fund Saba, received an overwhelming vote in support of its current investment strategy at the requisitioned general meeting on 22 January.
However, as the requisitioned resolutions to remove the directors and appoint two Saba-nominated directors were not passed at the January meeting, Herald believes the US activist – which owns 29.1% of its shares – may vote against the continuation resolution in order to trigger a potential winding-up of the company, so it needs investors with at least 30% of its shares to vote in favour.
Among those introducing a continuation vote is Abrdn Asian Income (AAIF), which announced the decision in January ‘so that shareholders can decide whether they wish the company to continue in its current form’.
The first vote will take place at the firm’s 2020 AGM, with votes every three years after that date in the cause of ‘transparency and shareholder empowerment’, to quote chair Ian Cadby.
Last year, Abrdn took the decision to wind up Abrdn Diversified Income & Growth (ADIG) and sell off its assets due to the persistently wide discount to NAV.
Another trust to introduce a continuation vote is Harbourvest Global Private Equity (HVPE), which as well as simplifying its investment structure and doubling its allocation to the Distribution Pool from 15% to 30% said it would hold a vote at its 2026 AGM to ‘give shareholders a say in the future of the company’.
HIGH-PROFILE NAME LAUNCHES CONTINUATION VOTE
Perhaps the most high-profile trust to go down this road, however, is the £1.4 billion market cap Finsbury Growth & Income (FGT), which has lagged its benchmark for some time.
As we reported last month, the resolution to introduce a vote after the end of this financial year was passed at the trust’s AGM although not without some fairly vocal opposition.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
magazine
