Investment trusts have been under pressure for the past few years with discounts widening to historic levels as investors took risk off the table.
This has left some facing discussions around whether they are still viable. While we have seen some give up the ghost, either through closure or merger, others fight on ahead of continuation votes.
A recent trend has been the promise of a tender offer if returns do not improve – the course of action taken this week by the European Opportunities Trust.
Formerly the Jupiter European Opportunities Trust, it has been run by Alexander Darwall since 2000 and changed its name when the manager went out on his own, launching the Devon Equity Management in 2019.
The £773m investment company has had a poor run for the past five years, making 10.6% at a time when the average IT Europe trust gained 39.8% and the MSCI Europe benchmark rose 40.6%.
Darwall backed European finance company Wirecard, which was the largest holding in the fund, before the company was discovered to be a fraud – hampering returns.
It is against this backdrop that activist investors have started to circle the trust, with Saba Capital taking a 5% stake in early September.
The trust has a continuation vote upcoming – something it has every three years – with the board announcing an olive branch to investors. If performance does not pick up between 2023 and 2026, it will buy back 25% of the shares in issuance at a 2% discount to the net asset value (NAV). Currently shares are on a 10% discount.
It has made this decision after “extensive shareholder consultation”, according to filings yesterday, and Ewan Lovett-Turner, head of investment companies research at Numis Securities, suggested this will have included large shareholders such as City of London (which owns 6% of the trust’s shares), 1607 Capital (13%) and Allspring (12%).
However, the period under consideration is after both the 2023 and 2026 continuation votes.
Lovett-Turner said this was “disappointing”. “We can understand it being offered as a carrot to gain support for the current year continuation vote. However, we do not believe it should be conditional on passing the 2026 continuation vote.”
He noted that, if performance does not improve in this time, the tender offer is unlikely to happen as the trust will have around eight years of “disappointing performance” and “will need more radical changes” if it does not deliver better value to shareholders.
The Numis head of research noted that this is starting to become a trend – particularly among trusts held by City of London.
Indeed, trusts where the firm has a large stake including abrdn New India, JPMorgan Indian, Schroder Japan and Asia Dragon are among those to offer similar proposals to shareholders.
But they are not alone. Templeton Emerging Markets Investment Trust (TEMIT for short) has a similar plan in place, with an end date of March 2024. Although manager Chetan Sehgal remains confident, it is a trend that investors could see more often in the future.
But is it worth it? Part of the reason these trusts are giving investors these options is to entice them to continue to keep the trust going – despite middling returns.
In some cases, managers go through period of poor performance and this is required, as over the long term they have proven to be good value creators. But in others, perhaps the best course of action is to vote no – or sell, providing the loss is not too great. For DIY investors with fewer shares, the second option is certainly easier.