You should be able to count on the board of an investment trust to look after your interests, says David Stevenson. But that may not always be the case.
One of the great features of investment trusts is that they boast truly independent boards of non-executive directors (NEDs). Unlike many other investment-fund structures, you should expect NEDs on an investment trust to fight your corner. Recent disputes at two income-based trusts show that a board on a mission can achieve a lot, even if the results can be a bit messy.
Shareholders get their way at Ranger Direct
The longest running of the two disputes is at Ranger Direct Lending, an American-focused but London-listed fund that invests in a range of financial lending platforms. Much of the lending was via a platform run by Princeton, which is now being liquidated. Given that, at one stage, lending to this platform accounted for nearly 30% of the loan book, these problems prompted a loss of confidence in the manager.
The board started looking at alternative strategic options, including appointing Ares, a big mid-market private-equity lender, as a new manager. So far, so good. But two major investors (Oaktree Capital Management and LIM Advisors) reckoned that the better option was to wind down the fund, not least because it wasn’t clear that Ares knew a great deal about working with specialist US direct-lending platforms. To complicate matters, some holders of zero-dividend preference shares also insisted that they should have a say. (Holders of these shares receive a pre-determined payout when the fund is wound down, rather than ongoing dividends.)
Ares then withdrew its application to manage the trust, after which Ranger’s board agreed to wind up the fund. But the dispute is not fully over, as Ranger’s board is urging shareholders to vote against two directors that have been nominated to the board by Oaktree and LIM at the annual general meeting next week.
This dispute reminds us that the inner logic of a fund, its managers and directors may not always be aligned with those of external investors. Sometimes the best thing is to wind down a fund, even if it goes against the instincts of some directors and other investors, who tend to presume they can fix a problem.
A mess at Invesco
This brings us to the other topical example of directorial activism. Invesco Perpetual Enhanced Income is a relatively successful bond-focused fund with well-respected managers from Invesco, which runs wider mandates worth tens of billions. However, its fees are a bit above the average for the peer group, and include a performance fee, which pushed total costs above 2%. The directors started negotiating to bring down the fees, but Invesco then decided it didn’t want to run the fund for lower revenues, especially as running the fund tied up a fair bit of the managers’ time. So Invesco decided to walk away, prompting the board to see if other managers were willing to run it for less, which they were. In the meantime, Invesco, which is also a big shareholder in the fund, has used its stake to call a shareholder meeting to vote on removing two board members.
Many of the other shareholders in this fund are private investors who hold their shares through nominee accounts with platforms, and may not easily be able to vote. So big institutional shareholders will decide the vote, the biggest being Invesco, with a 16.9% stake.
Presumably it is possible that Invesco could end up running the fund again if the board changes substantially. Investors are concerned and the shares have fallen to a 1% discount to net asset value (the value of the underlying portfolio), down from a premium of 9%. (See MoneyWeeek.com/invesco for more on this story.)
This dispute shows how messy matters can become. The board was right, in my opinion, to challenge the fees, but why it got to this impasse is unclear. Equally, the fund manager had succeeded in building up a solid franchise, and had delivered the goods. That said, I’m not sure these successes justified the fees, nor getting rid of directors with whom it disagrees.
Short positions… Odey makes a small comeback
• A hedge fund run by prominent Brexit supporter Crispin Odey has returned nearly 20% so far this year, helped by his “outsized bearish bets on equities and government debt”, say Miles Johnson and Lindsay Fortado in the Financial Times. A sharp increase in market volatility and a pay-off on some of his short equity bets (bets that shares will fall) have made Odey one of the world’s best-performing hedge-fund managers of the year. However, this is a “small comeback” for Odey, say Johnson and Fortado, after “ill-timed” short bets saw the European fund’s value crumble by 60% from its peak three years ago. The fund currently has a position against UK government debt equivalent to 147.4% of its net asset value, as well as a position against Japanese government bonds equivalent to 43.6% of its value.
• Shares in Neil Woodford’s Patient Capital Trust have gone up by 5% since last Friday, when the fund’s eighth-largest investment, Autolus Therapeutics, announced the pricing range for its upcoming flotation in the US, says Gavin Lumsden in Citywire’s Investment Trust Insider. The London-based cancer specialist is looking for a price of between $15 and $17 for the initial public offer of its American depositary shares (these allow US investors to hold foreign companies without the hassle of trading shares on foreign exchanges). This would add between £25.9m and £35.1m to Patient Capital’s holding in Autolus, and boost its net asset value by 3.1p to 4.2p. This is the first good news for the trust since its demotion from the FTSE 250 last month.
Jonathan Bush, co-founder and chief executive of US medical IT company Athenahealth, has stepped down after pressure from activist investor Elliott Management and a spate of allegations about his conduct. Bush has been accused of sexually harassing a former employee, assaulting his ex-wife, and acting inappropriately at an industry event. His downfall is “a stark reminder of the disciplining function of public markets”, says the FT’s Lex column. Athena’s board has said it would “explore” a sale of the company. Elliott Management last month made a $6.9bn offer for the company, which equates to $160 per share. However, analysts say that a private-equity buyer could “credibly pay $170 per share”.