Lack of board independence may make UK investment trusts targets for activist shareholders according to Simon Westlake at City of London Investment Group, a big activist investor in emerging market investment trusts. "Some boards have been too much in the pocket of the managers and the managers see discount control as a threat as it means buying back shares and tenders," he said in a recent FT article.

While activism in the sector dried up during the credit crunch, investment trusts are trading at widening discounts to their underlying net asset values and activists such as Laxey partners are said to be increasing their stakes. The £1.1bn hedge fund group is setting up a Dublin-domiciled fund that will aim to provide an absolute return from the investment trust sector.

Although activists can narrow discounts, there are concerns that the shareholder structure of investment trusts can lead to easy pickings for investors calling for trusts to be wound up. Many investment trust shareholders are private individuals who either do not bother to vote or find that they are disenfranchised through the pooled nominee system. Activist funds can therefore carry the vote with relatively little opposition. As Manifest's annual voting review has shown, investment trust voting turnout consistently creates considerable drag on the average UK turnout.

PERCENTAGE OF RESOLUTIONS

AGM

EGM

COMPANY TYPE

2008-09

2007-08

2008-09

2007-08

Investment Trusts

38.3%

39.9%

51.4%

44.3%

Other Companies

67.8%

65.6%

65.3%

57.8%

All Companies

62.3%

62.5%

62.8%

57.1%

Source: Manifest European Proxy Voting Review 2009

Standards of corporate governance in the investment sector have improved in recent years and boards have been trying to enhance shareholder value with the through the use of discount control mechanisms. However, it would seem that the difficulty of discounts and predatory shareholders refuses to disappear.

Links

FT >>

Association of Investment Companies >>