This week has been nothing short of a battlefield in the chaotic UK investment trust arena. A flurry of factors, ranging from the surge of index funds to the impending interest rate reset of 2022, along with continuous outflows from UK equities, have led to an upheaval in the sector. The landscape is now strewn with sub-par funds, languishing on significant discounts to net assets, grappling with lackluster performance.
To add insult to injury, the introduction of disclosure rules magnified the already high fees, prompting wealth managers to retreat from the sector to evade potential regulatory violations. However, the true perpetrator behind this turmoil appears to be the relentless force of S&P 500 tracker funds and global equities ETFs. Why bother with archaic investment vehicles boasting diverse assets and boards of directors when a simple ETF can outperform them with less volatility?
Even venerable stalwarts like RIT Capital Partners have not been spared, trading at discounts as steep as 30% in recent times. The situation has piqued my interest, compelling me to delve deeper into this melting pot for multiple Monevator Moguls articles, with many more on the horizon.
Investment trusts, the once-revolutionary collective investment vehicles, have lost their sheen in the face of a changing market. Initially intended to provide ordinary investors with exposure to a wide range of assets at minimal cost, these trusts now find themselves grappling with irrelevance. Modern day global trackers have overshadowed them, rendering their attempts to cater to sophisticated investors with exotic exposures futile.
Although investment trusts were conceived as ideal vehicles for owning illiquid or esoteric assets like music royalties and warehouses, they have fallen out of favor, facing neglect from investors. The moment these assets encounter challenges such as competing yields from government bonds, investors swiftly abandon these trusts, triggering a downward spiral in their market value.
It is evident that the market signals a clear message that investment trusts have outlived their utility. In the words of Brandon Lee from The Crow, “They’re all dead; they just don’t know it yet.”
Despite the prevailing sentiment that investment trusts are obsolete relics of a bygone era, I remain an investing romantic. While some view them as obsolete products peddled by overpaid fund houses and ignored by a disinterested market that has moved on, I draw parallels to J.R.R. Tolkien’s epic saga, The Lord of the Rings. The skirmishes unfolding in the UK Investment Trust Cinematic Universe eerily mirror the clash between the ‘last alliance of elves and men’ against the dark Lord Sauron, symbolizing modernity in Tolkien’s mythos.
The linchpin in this fantastical narrative is the formidable Boaz Weinstein of Saba Capital, an erstwhile American hedge fund manager metamorphosed into a supervillain in the investment trust realm. His audacious quest to acquire and subsume seven trusts has painted him as the antagonist in a drama where warriors on both sides – the press and the trust industry – fiercely engage in battle.
Critics argue that Weinstein’s motive to unlock value from trusts trading at steep discounts is opportunistic, driven by self-interest and broader business goals. While investment trust lore has always hinted at the prospect of an activist stepping in to liquidate a fund and unearth hidden value, Weinstein’s aggressive approach has amplified the stakes manifold.
The recent showdown where shareholders collectively voted against Saba’s takeover bid of the Herald Investment Trust underscored a powerful message of shareholder democracy. A resounding 65% of votes opposed the hedge fund manager, with a mere 0.15% of shareholders siding with the aggressor – a testament to the unity forged between fund managers and investors.
The alliance witnessed in this shareholder-led insurgency challenges the narrative that passive investing is eroding shareholder engagement. In a landscape dominated by index funds and ETFs, active fund managers and engaged shareholders play pivotal roles in directing capital towards promising prospects and scrutinizing investment decisions with care.
However, while the Monevator stance favors passive investing as the optimal strategy for the majority, the recent skirmishes within the investment trust realm evoke a sense of nostalgia and admiration for these institutions refusing to fade into oblivion. With one battle down and six more to go, the future of investment trusts hangs in the balance.
This resistance to the encroaching tide of ETFs and index trackers may symbolize a last stand by a generation of traditionalists, valiantly defending their trusts against impending obsolescence. As an investing romantic, I find myself rooting for Gandalf and his allies outside the gates of Mordor, advocating for a diverse ecosystem where investment trusts coexist alongside modern investment vehicles.
In a realm where innovation threatens tradition, perhaps there is room for both to thrive, each offering a unique value proposition. With the dust settling on one battle, the outcome of the broader war between investment trusts and their modern counterparts remains uncertain. Until then, the saga continues, with a resolute band of investors standing firm in defense of their beloved trusts.
Leave feedback about this