Investment trust shareholder rights: a beginner’s guide

We explain everything investors in investment trusts need to know about their shareholder rights and why voting matters. 

- This article was first published in March 2021. Updated in early January 2025. 

One of the longstanding, but perhaps understated structural advantages of investment trusts versus funds is their independent board of directors. It is their job to exercise independent oversight, hold fund managers to account (including the ability to sack them) and look after the interests of shareholders (such as by driving down costs).  

In addition, as a shareholder in an investment trust you have the same voting rights as shareholders in other companies. This gives you the opportunity to have your say and exert influence.

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With funds, you don’t get much of a say, and if you are unhappy with how the fund is investing or performing, pretty much your only option is to vote with your feet.

Unfortunately, only a small portion of retail investors use their votes. At interactive investor, we have for a number of years been campaigning to raise awareness of shareholder voting and are encouraging our customers to use their voting rights. It is easy to think that as a small shareholder your vote will not make a difference, but if increasing numbers of investors engage and use their votes it will result in retail investors having greater influence.

In regards to how investment trusts are purchased, it is platforms (including interactive investor) that are becoming more and more dominant on shareholder registers. This is a trend that’s here to stay as the change in the pension landscape (away from defined benefit or salary-related pensions to defined contribution schemes) has shifted the onus to individuals to take control of their financial future. 

Interactive investor customers are able to vote via the Voting Mailbox in their online account (under “portfolio” at the top of the page). Our customers also receive notifications through their ii app “voting mailbox” service, informing them when they are eligible to place a vote.

In November 2021, interactive investor made the ability to vote online a default option for all customers, rather than them having to opt-in to use the platform’s voting capability. 

• How interactive investor customers can vote

Investment trust fund mandate change – have your say

The firepower investment trust boards have in being able to sack a fund manager, as well as the fund management group, is a positive thing for shareholders. It is the responsibility of boards to fight your corner in ensuring that the trust is being managed in line with its investment objectives, while keeping a close eye on performance. 

With investment trusts, the board can either opt to find a replacement at the same fund firm or appoint a new fund management company.

As far as individual investors are concerned, a shareholder vote is required if this leads to “material change” to how the trust invests.

For example, if the trust invests in UK equities and will continue to invest in UK equities under new management, this will probably not be put to a shareholder vote. 

However, if it is a material change in strategy, such as an investment trusts investing in UK equities proposing to invest in global equities, then this will likely be put to a shareholder vote. 

Investment trust policy changes are usually well flagged in advance, and more radical proposals will usually take place in an Extraordinary General Meeting (EGM) rather than waiting for the date that’s in the diary for the Annual General Meeting (AGM).

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Continuation votes

Some trusts give shareholders the option of voting on whether it should continue or be wound up. Under the latter scenario, shareholders are paid their share of the company’s assets at or near net asset value (NAV), rather than the current share price.

Continuation votes are a permanent feature for some trusts, occurring once a year or every two, three or five years. 

In other cases, a continuation vote is triggered if a trust persistently performs poorly or has for long periods traded on a wide discount. The former usually leads to the latter.

In addition, a continuation vote can be called by disgruntled shareholders. Under the Companies Act 2006, the required percentage of share capital that must be held by a group of shareholders to be able to requisition a general meeting is 10%.

Common voting items at AGMs

Among the most common voting items at AGMs are approving the following: the report and accounts, remuneration report, remuneration policy and the final dividend.

Shareholders also have a say on electing and re-electing board members and auditors.

Proposed changes to an investment trust’s articles of association (a contract between the trust and its shareholders) also need to be approved. One example in recent years, following a rule change in 2012, has been some trusts proposing changes to the articles of association to allow capital profits to be distributed as income.  

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Issuing new shares

Boards also often ask shareholders for approval to purchase up to 14.99% of their own shares. Trusts tend to buy back their own shares to keep the discount or premium under control.

In addition, investors are also regularly asked to give their blessing for new shares to be issued. As part of this, investors are often asked to waive their pre-emption rights. Such rights give existing shareholders the right to purchase new shares before they are offered to other investors. The aim is to prevent existing shareholders being diluted against their will.

However, with investment trusts, waiving pre-emption rights is rarely a concern –  provided the shares are issued at a premium to the underlying investments – the NAV.  Waving the rights allows an investment trust to act quickly to issue new shares to increase liquidity and broaden the investor base. This also lowers costs as the trust grows in size.

It is important to note that there is no dilution to shareholders’ NAV or value of shareholding after a new share issue – again providing the new shares are issued on a premium. It is a different story if new shares are issued on a discount when pre-emption rights are waived – investors in this scenario will be diluted.

“Issuing new shares on a discount without pre-emptive rights is very heavily frowned upon by the market,” says Mathew Read, an analyst at QuotedData.

He adds: “In most cases, where shareholders are asked to disapply their pre-emptive rights, you will usually find another provision which requires that any shares issued in this way are to be sold at a price that is a premium to NAV.

“This is actually good news for existing shareholders. For example, let’s say a trust has an NAV per share of £1, but sells a block of shares for £1.05 in cash, the extra 5p of value is effectively spread out across the existing holders.

“In addition to this, this sort of share issuance should also be beneficial for existing shareholders as, all things being equal, it should increase liquidity in the trust’s shares and lower its ongoing charges ratio.”

What to ask at an investment trust AGM

Even if the resolutions on the table are, more often than not, ‘business as usual,’ investment trust AGMs are a fantastic opportunity to hear from managers and boards. If necessary, it is also an opportunity to hold them to account.

Some of the areas private investors can ask about at an investment trust AGM include:

•    Performance-related questions: particularly if the investment trust has over the short or long term underperformed its benchmark and/or the sector it sits in.

•    Portfolio-related questions: for example, you could ask - what have been the latest changes to the portfolio, have you introduced new themes over the past year, how have the sector weightings changed over the past year?

•    An outlook for the region or asset class the investment trust operates in against the wider macroeconomic backdrop: You could ask questions such as: how will your investment approach fare if interest rates remain high? Will you need to make changes to the portfolio?

•    The discount: (if the investment trust is trading on one) you could ask: why is the investment trust trading on a discount, and what is being done to try and reduce the discount – are the board proactively buying back its own shares?

•    Succession planning: (if the fund manager is in latter stages of his or her career) What steps are being taken to ensure a smooth transition if and when the fund manager retires in the coming years?

•    Sustainable investing: For example, you could ask - how does the investment trust implement sustainable investing as part of the investment process? Could you name examples of how you have successfully engaged with companies that has led to a positive sustainability outcome?

•    Skin in the game: You may want to ask whether the manager personally invests in the investment trust they manage, and, if they do – whether they have increased their personal stake over the past year.

•    Diversity – boards are becoming less male and stale, but it’s still an important question, and not just from a gender perspective. 

•    Do the board believe they have the right blend of experience? This can be topical, for example, where a trust has exposure to unlisted assets, which can require specialist knowledge. 

•    Performance fee arrangements: If a performance fee is in place, are the board confident that it is sensibly set?

•    For very small investment trusts: Has the board considered merging to create a larger, more liquid investment trust?