The quote ‘it is not the strongest of the species that survives, nor the most intelligent that survives – it is the one that is most adaptable to change’ is falsely attributed to Charles Darwin. But that sentiment, whoever wrote it, is very relevant to the investment trust industry.
As the fund-buying industry rapidly changes, elements of the sector are being left behind. And while change is happening, it isn’t happening fast enough.
Credit is due to the board of Henderson Global Trust, whose members have listened to shareholders and recently announced plans to wind up the trust and offer a rollover into two of Henderson’s other global equity funds. The factors that prevent change in the sector are well rehearsed. But investors should continue to press boards to improve the sector for the long term, even if it forces them to make uncomfortable decisions in the short run.
For instance, trusts should look to merge when in positions of strength, not weakness.
Few, if any, investors could argue that the three main UK equity income trusts run by Mark Barnett of Invesco Perpetual are badly run. They do not trade on wide discounts, have performed well and investors are well served by their manager and group. It is hard to argue that those trusts could not survive in the future as separate entities. But would any market participant really suffer in the event of the boards undertaking a ‘super-merger’ between the Edinburgh Investment Trust, Perpetual Income and Growth, and Keystone?
It wouldn’t reduce my choice as an investor. The manager runs them almost identically, with gearing levels the main differentiator. Fund buyers can choose the equivalent open-ended fund if worried about investment trust discounts widening, and benefit from being able to more easily reinvest the income it produces.
A bigger fund should mean lower costs, all other things being equal. The board would have greater negotiating power with the fund manager. The trust
will have a higher profile to attract new investors to the investment trust sector and compete with open-ended peers. A merger doesn’t guarantee outperformance, of course, but we, as owners of the trusts, see little downside to it being suggested.
Sadly, it isn’t as straightforward as I suggest. Boards and management groups can find many reasons – some valid – to block consolidation. Doubts remain whether many boards and management groups act independently of each other and in the best interests of shareholders. The lure of the golf course or the day at Lord’s – ultimately paid for by their shareholders – remains strong.
Most boards of successful trusts see no reason to change, and investors could certainly do more for the long-term best interests of shareholders. As the wealth management industry consolidates and evolves, boards and trusts will get left behind if they don’t look forward. If fund groups and trust boards follow the example of Henderson Global Trust and act in the long-term best interest of all their investors and not themselves, the sector will be a better one for it.
Stephen Peters is an investment analyst at Charles Stanley
