How the manager is paid, whether the net asset value can be trusted and if the directors are too close to the manager are the most important questions investment trust shareholders should ask of the companies they invest in, according to an activist investor.
Robert Naylor manages the Achilles Trust, an ‘activist’ investment company that buys into other trusts on wide discounts where shares trade below the value of their assets and presses boards to change course.
“When you are disaffected with the performance, you’ve got to get out there. You’ve got to vote. You’ve got to show that to the boards. Make it count and collaborate alongside us to effect change and make sure there’s good governance in the sector,” he said.
The Association of Investment Companies has been working to make voting possible through platforms and brokers, so shareholders have a voice.
Large discounts have been a problem for investment trusts for years but have started to narrow more recently. Partly, this has been thanks to buyback programmes, whereby trusts reduce the supply of their shares by buying some back themselves.
There are examples of trusts running a successful buyback programme, but experts have argued that closing a discount often requires a catalyst, a corporate event like a merger or the intervention of an activist.
Discounts can also narrow because the share price falls, and many of the renewables and alternatives trusts Achilles targets used to have discounts that fell when the 10-year gilt yield, the rate the UK government pays to borrow for a decade, rose.
That link was “near perfect” but has loosened, Naylor explained, and said that that is also down to activists like Achilles and to capital from Saba Capital, the US activist investor that runs requisition campaigns at trusts.
Lower fees would also be a good way of narrowing discounts and improving long-term returns as charges are a “drag on performance”.
The workload for a manager is heaviest when a trust is developing assets, growing and investing new capital. Once the underlying assets sit in individual special purpose vehicles with their own boards and governance, Naylor said, the manager is “harvesting”.
Naylor’s remedy was to tie the manager’s pay to what shareholders actually own.
“[Trusts should] charge on market cap. So you’re eating your own cooking and you’re aligning with shareholders,” he said.
The basis on which pay is calculated is central to Achilles’ campaign at Urban Logistics, for example, a real estate investment trust (REIT) where management put out an internalisation proposal, under which the trust would take its management in-house.
The proposal came with a headline number of £12m. Achilles worked through it, including valuing the shares that management would issue themselves at NAV rather than at the share price, and reached a very different figure.
“If you looked at the employment contracts that they would take, and you looked at the dividends over the period, we thought it was more like £32m,” he said.
Naylor added Achilles shared the analysis with the other investors on the register, who then “came on the journey”.
“What’s the integrity of that NAV?” was the second question on Naylor’s list, and a case in point was the PRS REIT, where the gap between the sale price and the NAV drew scrutiny.
Shareholders asked Achilles to look at the REIT when it was trading at a “massive discount” after the board awarded a four-year management contract. Achilles joined the board to improve governance but shareholders ended up so frustrated “that it looked like the only remedy here was to sell it”.
A total of 70 parties were approached, Naylor said, 30 entered the room and six made offers, with local authority pension funds the eventual buyers.
The price still looked low next to the NAV. Naylor said there were “pretty robust conversations with the valuers” over whether the figures reflected transaction values or modelled data.
He said “the market told us the value”, though compared with where the NAV was printing, “it looked like it was undervalued”.
Achilles has applied some of the same tests to itself, Naylor said, with share buybacks, a continuation vote in 2027 and a small independent board. He said it had “hopefully all the bells and whistles in there to show good governance”.
Achilles’ own shareholders have had their say on how the portfolio is run, too, with feedback saying that the trust was spread too thinly.
“Part of the problem is maybe I’ve been a bit too diverse in my holdings. Shareholders want me to have two to four holdings and just go for it,” he said.
The same conversations produced ideas for what he called the “second wave of activism”, with another 10 opportunities on the list.
“I’m just being empowered to go and have that engagement with boards, and that’s what they want me to do,” he concluded.