7 investment trusts face crunch votes: what it means for investors

Savers who own stakes in investment trusts have endured a frustrating few years as the value of their shares has failed to keep up with the actual value of the holdings of these quoted funds – in the terminology of the sector, discounts have become entrenched.

Now American institutional investors have spotted a chance to exploit these discounts by trying to take control of seven London-listed trusts and savers here will be wondering if other discounted trusts could become the target of similar attempts.

The seven trusts involved are vigorously fighting the US investors and are urging shareholders to vote against their plans, as we explain in more detail below.

What is an investment trust discount?

An investment trust is a listed company that itself owns shares in listed companies, or sometimes in other assets such as unlisted companies, bonds, property and infrastructure assets.

Because trusts’ shares are listed, their share price is determined by supply and demand and is therefore not automatically tied to the value of the trust’s assets. The two can diverge and frequently do. When the share price exceeds the value of the trust’s assets per share – or to put it another way, when the trust’s market value exceeds the value of its assets – the trust is said to trade at a premium. When the share price is less than the asset value per share, the shares are trading at a discount.

In recent years discounts have been far more common than premiums. Just 25 of the 309 trusts that belong to the Association of Investment Companies, the trusts’ trade body, trade at a share price premium relative to the value of their assets and the average discount across the trusts is 15.6%¹ (we exclude 3i, whose great size and very large premium distort the figures).

There is a City adage that when the stock market refuses to recognise the true value of a stock, someone else will. The prevalence of discounts on investment trusts has indeed attracted attention from a variety of quarters: some have been bid for, some have liquidated themselves so that the assets can be sold for their true value and the proceeds returned to investors, some have been active buyers of their own shares in an attempt to redress the balance between supply and demand. But many trusts remain stuck with stubborn discounts, many in double figures.

Isn’t a discount a good thing if I want to buy an investment trust?

Discounts are a double-edged sword: they can indeed be beneficial if they enable you to pay a reduced price for a share that then rises because the discount diminishes or disappears completely – or is even replaced by a premium. However, if you buy an investment trust share at a discount, the discount could become wider, which risks cancelling out any gains made by the trust’s actual assets.

Long-term holders of trusts that have been stuck on a discount for a long time have therefore been hoping for a catalyst to reduce or eliminate the discount.

What is happening at these seven trusts targeted by US investors?

An American hedge fund called Saba has bought large stakes, of almost 30% in some cases, in seven London-listed trusts. Such big stakes give it the right to call special meetings, at which shareholders will be asked to vote on proposals to sack existing boards and replace them with new directors nominated by Saba. If shareholders approve its plans, the new directors will consider options such as terminating the contracts of the existing management companies and replacing them with Saba itself.

The trusts would then look at new investment strategies radically different from the existing ones, such as merging with each other and then seeking to take over other discounted investment trusts. Saba would also seek to offer investors a cash exit at close to asset value, so shareholders would be able to sell at just a minimal discount.

The seven trusts are Baillie Gifford US Growth, Keystone Positive Change, Edinburgh Worldwide, The European Smaller Companies Trust, Henderson Opportunities, Herald and CQS Natural Resources Growth & Income.

What are shareholders’ options?

Shareholders will decide whether Saba succeeds or fails. Saba needs a simple majority of the votes cast at the general meetings to win the day; therefore, a percentage of shareholders greater than Saba’s stake in the trust concerned will need to vote against it if the trust is to carry on as it is now. In the case of Baillie Gifford US Growth, for example, Saba has 28.4% of the votes, so more than 28.4% of shareholders would need to vote against the hedge fund for its proposals to be defeated. Private shareholders collectively own large stakes in the trusts and their votes are likely to determine the outcome. Richard Stone, chief executive of the AIC, said: ‘It’s vital that shareholders vote on the future of their investment trust. The final decision rests with them.’

Almost all private shareholders these days hold their shares via platforms such as Fidelity. Platforms will normally allow you to cast your vote for or against the Saba motions online, although the deadline may be a few days earlier than those stated by the trusts themselves. For example, Baillie Gifford US Growth’s meeting is due to take place on 3 Feb, its deadline for receiving shareholders’ votes is noon on 30 Jan and it would be best to ensure your platform has your vote a few days before that – in other words, in about two and a half weeks’ time. Most of the meetings are in early February, although Herald’s is on 22 Jan and Edinburgh Worldwide had not set a date at the time of writing.

If you own shares in one of the seven trusts via Fidelity and want to vote, log on to your account at fidelity.co.uk, then select ‘My accounts’ from the top-right menu bar and go to ‘Profiles’, select ‘Preference centre’ and then the ‘Shareholder voting & information’ tab. Turn on the service by clicking the tab from ‘Off’ to ‘On’. Within two working days you’ll receive an email from a partner company, Broadridge. You will then be able to vote. If you have not yet set up this service, be sure to allow for the two days required for it to be up and running.

Alternatively, investors who want to take advantage of the recent bounce in the trusts’ share prices, partly caused by Saba’s purchases, can simply sell their shares.

How have the trusts responded?

There has been unanimous rejection of Saba’s proposals. Many rejected Saba’s claims that its proposals represented good corporate governance and criticised what they called a lack of detail about the proposals. All seven trusts urged their shareholders to vote against all the resolutions put forward by Saba.

What are the implications for other trusts?

Saba’s actions have at least served to focus attention on investment trust discounts and it’s possible that all trusts, not just those targeted by Saba, will step up their attempts to reduce any discount, via measures such as share buybacks, mergers with other trusts or even the more drastic step of liquidation. One senior industry source told Fidelity that all boards would be ‘galvanised’ into action on discounts by Saba’s actions.

If Saba succeeds in taking control of some or all of the seven trusts currently in its sights – or perhaps even if it fails – it may want to try the same approach with others; indeed it already has stakes in many other trusts.

Where can I find more details and keep track of developments?

Saba has a website dedicated to its campaign to take over the seven trusts: www.mindthegap-uktrusts.com. For information on the individual trusts, go to the relevant pages of Fidelity’s website or that of the London Stock Exchange. For example, the latest news from Baillie Gifford US Growth can be found here (Fidelity) or here (LSE).

Source:

¹ AIC, January 2025

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. The shares in these investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.