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. 

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.

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Unfortunately, only a small portion of retail investors use their votes. At interactive investor, we are 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. 

At interactive investor, customers can subscribe to receive shareholder materials and voting information directly from companies. The service allows customers to vote electronically rather than filling out forms.

• Sign up to interactive investor's free voting service 

Investment trust fund mandate change – have your say

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

In contrast, funds have fund governance bodies and at least 25% of the board is required to be independent. Fund governance bodies are fairly new and were introduced at the end of September 2019. Prior to this, the fund manager had only his or her employer to answer to – the fund management group. 

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. A recent example is Temple Bar (SE:TMPL), which last September switched from Ninety One (formerly Investec) to RWC Partners. The trust’s investment objective and strategy (of investing in UK value shares) was unchanged, so the change in the fund management group was not put to a vote.

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But, Witan Pacific’s move to Baillie Gifford last September did require a shareholder vote due to its change in strategy. The trust formerly invested in Asia shares, but now invests exclusively in Chinese equities and its name has subsequently changed to Baillie Gifford China Growth (LSE:BGCG).

Keystone investment trust’s recent move to join the Baillie Gifford stable under its Positive Change team was also approved by shareholders. The trust is now called Keystone Positive Change (LSE:KPC), and it has moved to a global mandate and away from its previous focus on UK equities.

Investment 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).

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. Alliance Technology Trust (LSE:ATT), for example, is a high-profile example of a trust with a continuation vote coming up at the end of April. In this case, the continuation vote takes place every five years and, given the trust's stellar performance, shareholders are expected to overwhelmingly vote in favour of the trust continuing.

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.

Last year, Aberdeen Japan (LSE:AJIT) and India Capital Growth (LSE:IGC) both had continuation votes initiated. Aberdeen's was the result of its wide discount and India Capital Growth's was triggered by performance. In both cases, shareholders voted in favour of the trusts continuing.

JP Morgan Brazil, however, lost its continuation vote in November. In this instance, the board recommended that shareholders voted to wind up the company owing to its poor performance.

In addition, a continuation vote can be called by disgruntled shareholders. A current example is Strategic Equity Capital (LSE:SEC). Two long-term shareholders have called for the trust to be wound up, accusing the board of mismanagement. The vote takes place on 30 March.

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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.  

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.

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“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.”