- Shareholders at multiple trusts will cast their votes in the coming months
- We identify which names look most at risk
The optimists would have you believe that the worst is finally over for the investment trust sector. Interest rates have apparently peaked, wide share price discounts are likely to limit further falls and the reform of cost disclosure requirements could remove one of the many challenges facing the space.
But plenty of funds still need to fight for their future in continuation votes before conditions truly improve. Some of these look more challenging than others, and the story of Hipgnosis Songs (SONG) reminds us that investors can and will vote a trust down if they are dissatisfied.
Upcoming continuation votes
Trusts of all different stripes face continuation votes in the coming months, from equity funds to life sciences debt vehicle BioPharma Credit (BPCR). Analysts believe some could have a tougher time getting through such votes than others.
Take River & Mercantile UK Micro Cap (RMMC), which had a stunning 2020 and 2021 but whose shareholders are currently down to the tune of around 23 per cent over the three years to 8 December. The trust operates in a specialist area, and it’s notable that rival fund Downing Strategic Micro-Cap (DSM)’s board recently proposed to commence a managed wind-down of the portfolio on the back of a “continuing undervaluation of both micro-cap stocks and small investment companies”.
Without many obvious rivals and with other appealing traits – including a tendency to return cash to shareholders whenever the trust’s market capitalisation exceeds a certain level – RMMC may yet command the loyalty of its shareholders at a continuation vote in March. But some worry this could be a close affair.
“I would expect it to pass given a largely supportive shareholder base. However, performance has not been great so it might be a closer call than some expect,” said Mick Gilligan, head of managed portfolio services at Killik & Co. “If nothing changes in the mood of the market there’s a possibility this one goes,” added QuotedData head of investment company research James Carthew.
One controversial name facing down a continuation vote is Chrysalis Investments (CHRY), the capital growth play sitting on two years of controversy and terrible performance.
The trust’s board has outlined various measures to improve ahead of a continuation vote due in April, including the investment managers going it alone in order to focus exclusively on the trust. The trust also announced earlier this month that it had a potential asset sale lined up that would imply an increase of roughly 5.5p per ordinary share to the trust’s net asset value (NAV). “There’s a £33mn uplift, which to me implies they sold something and might be getting cash back, which could lead them to do a lot of buybacks and argue it’s not a basket case and there’s value in there,” Carthew said.
Portfolio gremlins
Another name to watch is BioPharma Credit, which invests in the debt of different life sciences companies and tends to come with a chunky share price dividend yield. The fund has seen one of its borrowers, LumiraDX, experience liquidity problems, alongside the resignations of its chief executive, chief scientist and chief technology officer in early November.
This crisis is a problem for the trust given that the loans to LumiraDX made up 15.2 per cent of the portfolio at the end of September, and a potential spanner in the works at its continuation vote on 28 December. The portfolio has looked robust in other respects, however, which might help calm shareholder nerves.
Elsewhere Abrdn European Logistics Income (ASLI) has a vote due in June, with the board carrying out a strategic review in anticipation of this. “We may see some bid interest here ahead of the vote,” said Gilligan. "The difficulty is that the portfolio is relatively small as real estate investment trusts go and is spread across quite a few countries. Given this, piecemeal disposals may be more practical.”
Circumstances could force continuation votes at other trusts too. JLEN Environmental Assets (JLEN) must put forward a vote if its shares trade at an average discount of 10 per cent or more over the course of any financial year, the same trigger as BioPharma Credit, and the board recently warned that the year to date average had come to around 13 per cent. It said it was “actively monitoring” the discount and would engage with shareholders in the coming months about any concerns.
Elsewhere, the £56mn Barings Emea Emerging Opportunities (BEMO) must carry out a tender offer of up to 25 per cent of its issued ordinary shares in late 2025 if it fails to hit a performance target – something that seems likely given the fact it had to write down the value of its Russian assets at the time of the Ukrainian invasion. “If the trust gets much smaller [via the tender offer] they might have to ask if people want it to keep going,” Carthew said. The trust’s board has said it would “evaluate the possibility of a tender offer alongside other strategic options” if it is triggered.
