As we noted last week, the drastic measures recently unveiled by Hipgnosis Songs (SONG) show just how far some investment trusts will go in their efforts to survive a continuation vote. But SONG isn't alone in dealing out the sweeteners as it hopes to win over shareholders.
That much seems fairly evident from the latest annual report for the European Opportunities Trust (EOT), which faces a continuation vote in November. Once a top-performing European equity fund, EOT took a big performance hit in 2020 due to manager Alexander Darwall's heavy allocation to Wirecard, the payments group involved in a multi-year fraud.
That has led to the trust's shares languishing on a reasonably big discount – and to the presence of several big value investors on the shareholder register. It's not inconceivable that they'd want to see the trust wind up and return its proceeds to investors, although its board does say it has sought feedback from shareholders and is confident the continuation vote will be passed.
So how will EOT persuade shareholders that it should keep going? The results detail a few possible sweeteners: the annual dividend has increased by 40 per cent compared with a year earlier, and the investment management fees charged to the trust should fall from June.
We have also seen continued buyback activity to try to keep the share price discount in line, and the assertion by chairman Matthew Dobbs that the trust's underperformance over a five-year period "should be set in the context of the longer-term outperformance achieved for the company's portfolio since launch in November 2000".
Darwall has a penchant for pretty chunky positions in structural growth stories, with Danish pharma company Novo Nordisk (US:NVO) contributing nicely to performance in recent times, but he remains a fairly divisive figure in the wake of the Wirecard collapse. Some, including myself, have previously made the case that his process appeared to hold up despite misjudgements on Wirecard, while others have lost faith.
In the context of this vote, it seems likely that professional investors will be much more instrumental in whether or not Darwall's fund now lives to tell the tale. But there are a couple of broader lessons for us to take from this particular drama.
Firstly, it makes sense not to get too swayed by small measures that appear designed to win over shareholders. A reduction of investment management fees on a trust is always welcome, but should not distract from our assessment of whether a fund is performing as we would hope, what role it plays for investors and whether we can explain away any underperformance. It's always most important to assess the underlying portfolio, the investment process and whether the manager is sticking to the latter.
Secondly, keep an eye out for big investors who are seen as value aficionados or even activists on the shareholder register. To detail a few, the names cropping up on the EOT shareholder register are 1607 Capital, Allspring, Saba Capital and City of London Investment Group (CLIG).
Such investors can sometimes help accelerate changes at trusts going through a tough time – potentially a good thing for other buyers, but also pretty disruptive. At a time when so many trusts look 'cheap', that particular crowd could have greater influence in the sector than normal.
