Originally published at: http://whichinvestmenttrust.com/sharesoc-provides-a-loud-voice-small-shareholders-like-you/
The group campaigns for the interests of the individual shareholder as well as fulfilling the role of an educator, with masterlasses and a regular periodical. So why not get involved! ShareSoc was set up by a small group friends including Roger Lawson, the Deputy Chairman, with the aim of bringing individual shareholders together to campaign…
Originally published at: http://whichinvestmenttrust.com/sharesoc-provides-a-loud-voice-small-shareholders-like-you/
The campaign against Graphie Enterprise has to have been amongst the most ill-conceived of ideas. This is private equity, where assets might be difficult to sell or where the prices realised might be lower than the figure on the books, and this could be the case for a ‘forced seller’ that needs cash in order to buy back its own shares. That, or the trust needs to hold a higher allocation to cash in order to facilitate same. In both cases this is likely to be detrimental to long-term NAV returns, and it the performance the NAV which will largely determine the return for the long-term investor.
Buybacks are simply to the benefit of short-term investors rather than those of us in it for the long term. I want the board and manager of my PE ITs to concentrate on the long term rather than having to look over their shoulders and pander to the short term carpetbagger.
Personally, I am not a fan of any form of discount control, but if they are to be implemented then I think that they are more suitable where the assets held are liquid, such as most equities. But there have to be questions over its suitability where the assets are illiquid.
For reference, I do not hold GPE, although I did so a number of years ago.
I think discount control policies work for some and not for others. Personal Assets and Finsbury are two that use them well in my view but I don’t want them to be universally adopted because it means a trust has to buy back its shares when its underperforming, and that will likely coincide with the stock market being cheap. This is when I want to see my fund manager buying stocks, when they’re cheap.
I don’t know what ShareSoc did with Graphite @arkwelder but in principle it seems like a good organisation. They are new to me so I need to take a look at it a little bit further but I like the idea of having an organisation to represent smaller shareholders like me and £45 doesn’t seem like a lot of money to become a member.
@derekw, I think that ShareSoc are right to have a go at the likes of Alliance Trust where I think that the board is a bit too ingrained in the ways of the management. But the PE sector in general moved to wide discounts during the Credit Crisis, and also subsequently mostly narrowed together too.
I’d be far more sympathetic to their cause if they took on the likes of Hansa Trust, where the dual share structure allows vested interests to have control of the company with only 17% of the total share capital.
Personal Assets actually highlights that there can be problems with discount control; in their case, generating sufficient revenue to be able support the dividend on the expanded capital base. The board’s solution has been to change the mandate of the company a couple of times to fit in with the effects of their discount control implementation. I am a holder of PNL and this doesn’t affect my immediate investment objective, but I would be concerned if I was a holder for the long term - to me, it highlights that something in their investment mandates and discount control are incompatible.
I agree with you on discount policies @arkwelder although what you also can’t disagree with is that some people want them. They are popular with some investors who want their investment trusts to behave and look like a unit trust. I think it is a crazy idea.
I think trusts should have discount policies and should aim to reduce discounts or premiums but not to the extent of having hard zero discount policies because if there is an economic disaster the stock market will go down regardless of your policy and all you will do is shrink your trust to nothing.
I guess if you disagree with the ShareSoc campaign on PE trusts you should get involved. I didn’t know they got involved with trusts too. I don’t buy too many shares, I prefer trusts and funds.
It might be a good idea for some of us from Which Investment trust forums join to fight for what we want trust Boards to do no?
I am completely unfamiliar with ShareSoc but having an organisation that represents the ordinary shareholder sounds like a sensible idea to me.
I don’t know about the campaign @arkwelder is referring to, though I do take his point about illiquid asset classes meaning the managers are inhibited somewhat as to what they can or should do about discounts, but I think there is many other issues I get annoyed at too and where I’d like some involvement.
If an investment trust group does take off at ShareSoc I may well be inclined to get involved.
It sounds like an interesting idea to me too. There is a need for an investment trust shareholder group, surely, and ShareSoc look like a good place to form one.
If you look at their website you’ll see they’ve campaigned on a number of investment trusts already including Alliance Trust of course.
I just looked through he ShareSoc website which seems a little old fashioned to me but I like what they’re trying to do, even if they aren’t always spot on, as with the private equity funds, which I agree shouldn’t be wasting time buying back shares when they’ve got an illiquid portfolio of holdings @arkwelder.
I’d be up for a group of us joining them and getting involved. It’s only £45. Keep me posted dudes!
arkwelder: The Graphite Enterprise campaign was not focussed solely on share buy-backs. We just wanted the company to do something about the very wide discount it was on. There were various options open to them, and they did take some steps to improve matters. Indeed the discount has narrowed since so the campaign is no longer active. See this page of our web site for more information: http://www.sharesoc.org/campaigns3.html (and yes we are working on an improved web site with a more modern feel). It did however seem a typical example of an investment trust run more in the interest of the fund manager than the shareholders.
As regards Hansa Trust, this is not a case we have looked at but if there was some interest in doing so let me know. But all campaigns do require some active interest by shareholders with an interest in the company concerned and willing to put in some effort. Campaigns take a lot of effort and some expense, so need to be led by concerned shareholders.
ShareSoc might be interested in forming a group that focusses on investment trusts (indeed we already are forming one for VCTs). There are some general issues with investment trusts that need pursuing - for example, directors who sit on the board for many, many years and may become too sympathetic to the fund manager (Graphite was a good example of that!). But we do need some enthusiast(s) to take that on. Anyone interested may care to contact me.
Roger Lawson, ShareSoc.
@Roger_Lawson, in the immediate aftermath of the Credit Crisis all private equity investment trusts moved to discounts, some of them very sizeable - GPE was not the only one to do so. In fact, other PE ITs such as Pantheon International Participations moved to substantially wider discounts than GPE, 88% for PIN versus 65% for GPE.
Subsequently, those sector-wide discounts narrowed en masse (except for those that were found to have their trousers down, such as CDI), so what evidence is there that ShareSoc’s activities were responsible for the specific narrowing of GPE’s discount any more than the sector-wide trend?
For a long term investor, a discount is a potential opportunity and not a threat. And if the fear is that the IT could subsequently move to a (wider) discount then the investor is in the wrong type of investment - that simple. And a campaign to badger the Board into narrowing a discount simply benefits short-term speculators looking for a quick buck - I want the Board to concentrate more on delivering long-term NAV and/or income returns because success in this area will be to the ultimate benefit of the long-term investor, and success in this area should help to keep discounts narrow - for those that worry about such things.
Arkwelder: you are right that all PE trusts moved to wide discounts, and most of them subsequently narrowed. But that was because a lot of them took specific steps to try to narrow the discounts which were clearly too wide. If you are saying that wide discounts are good, and should be ignored, then I regret to say you live on a different planet to me. Wide discounts are very damaging to those who wish to exit (who may be you or your executors) and certainly it is generally accepted wisdom that investment trusts should have some kind of discount control policy. The problem at Graphite was a supine board who chose for a long time to do nothing in the hope that “all will come right in the end”. They changed their mind on that as a result of pressure from ShareSoc and investors in the company. Another example of course is Alliance Trust who have been on a wide discount for some time and that is symptomatic of some more fundamental problems in that company. Hence our campaign on that company. There are some investors who are really keen on wide discounts and no discount control policy so they can pick up shares on the cheap. But that only works if the discount subsequently narrows, which it rarely does unless some action is taken.
That is a total fallacy.
If a trust is bought at a 30% discount and then sold at a 30% discount then its effect on the investor is neutral; there is absolutely no damage - nor benefit - to the investor.
If a trust is on a 10% discount and is sold at a 20% discount then this tells us absolutely nothing about the return that the investor has made, only that the return could have been a bit higher. It certainly does not mean that the investor has made a lower return than their initial investment, and this does seem to be an errornous assumption that is made by some. I might have bought an IT on a 10% discount at a price of 200p, and sell it many years later when it is on a 20% discount and at a price of 800p. How damaging is that?
It does not matter which planet an investor happens to come from, both of those are pretty key to understanding discounts and how investment investment trusts work. Wide discounts are not necessarily good, but they are not necessarily bad either. They merely need to be understood.
Discounts do narrow without action being taken by the Board. They narrow when the particular investment remit of the trust comes back into fashion and investors buy back in. This is exactly what happened with private equity ITs once it was realised that armageddon was not going to occur - investors bought back in and the discounts narrowed.
If you do understand the discounts at which GPE has traded, then you will know that it was trading at a narrow discount before the Credit Crisis, and doing so without any intervention from yourselves. What kind of ludicrous situation would have occured if GPE had had to buy back shares during that period of crisis just to keep the discount down?
I think your comment that “If a trust is on a 10% discount and is sold at a 20% discount then this tells us absolutely nothing about the return that the investor has made” is a quite remarkable statement. But I’ll let other folks comment on the wisdom of that view.
What do you find so remarkable about a basic statement of fact? If a trust is bought at a 10% discount and later sold at a 20% discount then what does this tell us about whether the investor has sold at a profit, a loss, or broke even? Absolutely nothing. Of course, it might mean that a short-term punter is more likely to sell at a loss, but not the case for the long term investor.
Perhaps an expansion on what is said later in the same paragraph from which the edit was taken might be of assistance:
- A trust is bought for 200p and is trading at par, and a number of years later is sold at 800p whilst trading at par. What is the return to the investor?
- A trust is bought for 200p and is trading a 10% discount, and a number of years later is sold at 800p whilst trading at a 20% discount. What is the return to the investor?
- A trust is bought for 200p and is trading a 20% discount, and a number of years later is sold at 800p whilst trading at a 10% discount. What is the return to the investor?
I think an investment trust Board whoever they are should have a discount control policy. Alliance Trust is a good example of this and I think ShareSoc’s campaign here is fantastic. However in case of trusts that invest in illiquid investments such as private equity, but also property and infrastructure there are severe limits to what they can do about the discount.
What I wouldn’t support is PE trusts buying back their own shares, unless they were flush with cash that their investments would not be calling upon. They should be doing things like communicating with investors, maybe having continuations votes and maybe a continuation vote every two to three years. I’m not familiar with ShareSoc’s campaign with Dunedin but if it extended to the last three suggestions or something similar I’d be supportive but I’d be cautious of share buy backs.
I think it’s healthy for a Board to feel the pressure from shareholders to reduce the discount, and I don’t believe it matters if they invest in private equity, shares or property. If I had invested in Dunedin on a narrow discount and then watched the discount bloom to multiply my losses, I’d be pressing damn hard for the board to do something about it including buying back shares.
I fully support ShareSoc’s campaign and @Roger_Lawson’s efforts.
If you invest in private equity you have got to be willing to commit to a 5-10 year investment. I feel a bit uneasy about a board being pressured to buy back their shares to close a discount because it’s an illiquid investment, which means they cant simply sell down shares to raise cash.
I have no problem with other measures being taken to help close a discount, not sure what measures were used in the case of Dunedin, if it was other than repurchasing shares then I would likely support it.