Ian Cowie: investment trust shareholders should use their votes

Our columnist explains that having independent boards and being a shareholder is another key advantage trusts have over funds.

A financial flash mob called WallStreetBets (WSB) hit the headlines when it briefly forced a share-price spike in an obscure video retailer - GameStop (NYSE:GME). But newish technology and social media are driving much more important changes to improve the investment trust industry.

They have already helped to cut costs and raise returns by making it easier for everyone to find ‘live’ or ‘real time’ information about shares in general and investment trusts in particular. In plain English, individual investors today can easily get hold of news and analysis that used to be restricted to institutional investors.

Now, senior financial figures are calling for small shareholders to become more engaged and empowered. Investment trust shareholders should exercise our right to vote because nobody will ever care as much about our money as we do.

As a DIY investor and a financial journalist, I must admit to mixed feelings about WSB, an online chat forum that enabled large numbers of small speculators to fleetingly make fools of a few hedge funds. The latter had rashly let it be known they had ‘shorted’ GME, or bet the price would fall.

The hedgies got clipped when the WSB flash mob bid up the GME price. Because everyone hates City fat cats, this attracted the gleeful attention of news desks everywhere, plus many folk who know nothing and care less about investment.

These open-mouthed newcomers to City esoterica included an old school friend who usually tells me how “boring” he considers the stock market but who suddenly wanted to know all about shorting, contracts for difference (CFDs) and WSB. He helpfully added that he didn’t want me to baffle him with any “technical stuff’ or what, funnily enough, he referred to as “TLAs” or three-letter acronyms. There’s no pleasing some people.

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So I suggested to my old friend that he should stay away from CFDs, GME, WSB and all the rest of it. I said there is nothing new about popular delusions and the madness of crowds - a journalist called Charles Mackay wrote a good book about these phenomena 180 years ago.

I added that financial reality could not be defied for long and predicted that a few folk who got into GME early would make masses of money, while most of those who followed the crowd would lose the lot.

Sure enough, GME’s share price briefly soared from $2.58 to $483 but plunged to trade at $51 this week. Let’s hope small speculators who got sucked into this bubble didn’t bet too “bigly” - as they say in America - before it burst.

Here and now, newish technology in the form of online investment platforms - such as interactive investor - are having much more beneficial effects by raising awareness about the unique advantages of investment trusts.

Regular readers will know these include gearing - or the ability to borrow in a bid to boost investment returns - and dividend smoothing - or the ability to retain up to 15% of returns in good years to sustain shareholders’ income in bad years.

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Independent boards of directors are another feature of investment trusts that is absent from other types of pooled fund, such as unit trusts or exchange-traded funds. Annabel Brodie-Smith, a director of the Association of Investment Companies (AIC), told me: “The value of investment company boards is clear. In 2020 alone, 32 boards negotiated lower fees for shareholders – around a tenth of the entire investment company universe.

“There were high-profile management changes, a merger of two well-known companies and 10 companies winding up and returning capital to shareholders. Putting shareholders’ interests first demonstrates that the structure of investment companies promotes good governance.”

For example, Edinburgh (LSE:EDIN) switched fund management from Invesco to Majedie; Temple Bar (LSE:TMPL) flipped from Ninety One Asset Management to RWC; and Witan Pacific moved manager and became Baillie Gifford China Growth (LSE:BGCG). Meanwhile, Perpetual Income & Growth merged with Murray Income (LSE:MUT). Despite some cynicism about turkeys not voting for Christmas, some boards did wind up struggling trusts, such as JPMorgan Brazil, Henderson Alternative Strategies and Aberdeen Frontier Markets.

Richard Wilson, chief executive of interactive investor, points out that “while the Reddit/GameStop saga will fill column inches for a few weeks, the real story here is the rise of the retail investor”.

He added: “We applaud shareholders who want to get their voices heard and believe the most effective way of doing this is through their vote. Many interactive investor customers may not know that if they hold shares via our platform, they can still vote at company annual general meetings (AGMs). And what is less understood is the voting process itself. We want to change this, by encouraging and helping our customers to use their right to vote on the ii platform. 

“As recent events in the UK and US have shown, small shareholders understand there is power in numbers, and the collective might of retail investors can have an influence. But the platform industry has been too quiet on this issue.”

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Brodie-Smith agreed. She added: “Some platforms proactively help shareholders vote and attend AGMs whereas other platforms could definitely do more. This is an important issue for the investment company industry so watch this space for further details soon.”

Who knows, as fewer private sector employers offer traditional final salary pensions and more of us are forced to take an interest in stock-market investment, it might even reverse the decline in the percentage of UK plc owned by individual investors, that has fallen from a peak of 54% in 1963 to nearer 10% now.

Better-informed investors are likely to take more interest in how pensions and pooled funds perform, while shareholders should exercise our right to vote. Whose money is it anyway? 

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.