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Big questions for Invesco Income Growth after low turnout at continuation vote

15 September 2020

Invesco's last remaining UK equity income trust survived a continuation vote but investor apathy for the £135m Ciaran Mallon portfolio raises longer-term doubts.

Invesco Income Growth (IVI )’s shareholders have voted against winding up the investment trust, one of the smaller members of the Association of Investment Companies (AIC)’s UK Equity Income sector, although there is little sign winning the continuation vote will spark the rerating of its shares its board may have wished. 

At the annual general meeting on 10 September, 79.4% of shareholders backed a resolution that the £135m closed-end investment company managed by Ciaran Mallon should continue. With a fifth of investors voting against it was not a resounding victory, however, athough turnout was also very low.

In total, just 34% of share capital cast a vote, meaning 4.45m shares, representing 6.9% of the total, voted to call it quits.

The board chaired by Hugh Twiss declared itself ‘delighted’ with the result, but added it would assess the votes cast and ‘engage with shareholders as appropriate, to determine what, if any, action to take’.

In January the board bowed to shareholder demands for a continuation vote, after the shares traded at a consistently wide discount for several years, reflecting a lack of investor demand.

Then, as today, IVI’s shares were trading at nearly 13% below net asset value (NAV), which is also the average over the last 12 months. 

That is double today’s 6% average discount across the UK Equity Income sector, which has widened from 3% in late January as the sector has performed poorly during the pandemic. Though Invesco Income Growth’s shareholders may take some consolation the trust has not derated further in that environment, more pertinent is the lack of any obvious catalyst for the discount to close.

‘Radical action’ still needed

In July’s annual results, Twiss ruled out share buybacks for the time being, after the board concluded that ‘to achieve a significant and sustainable reduction in the level of the discount would require such a significant capital commitment that it was not in the best financial interests of the company’.

Numis Securities praised the decision to hold the vote but analyst Priyesh Parmar suggested that - in common with other small trusts -  more ‘radical action’ such as a merger might be necessary.

‘The fact that the board indicates that it believes a buyback policy could lead to a substantial outflow of assets is an indication that all is not right with the shareholder base and market position of the fund, and demonstrates it is difficult to stimulate fresh demand for a relatively small fund,’ he said.

While positive to the NAV, buybacks reduce the size of an investment company and by exacerbating the lack of supply or liquidity in the shares can further deter natural investors such as wealth managers.

Invesco clings on

Passing the continuation vote means manager Invesco still holds on to a portion of its once mighty UK Equity Income trust range.

After long-time performance struggles under the now-departed Mark Barnett, the fund group has lost first £792m Edinburgh (EDIN ) and then £477m Perpetual Income & Growth (PLI ) in the last nine months. The latter is now merging with Aberdeen Standard’s £487m Murray Income (MUT ), which was suggested could set off a wave of trust consolidation, providing an alternative for arguably sub-scale funds like IVI.

The ‘obvious option’ of a merger with either of the trusts formerly managed by Invesco is now gone, Parmar noted. In the UK All Companies sector, Invesco also manages £161m Keystone (KIT ) and the £43m Invesco Perpetual Select - UK (IVPU ) share class, presenting more leftfield merger options.

Mallon (picture)’s profile has been boosted as he, along with Keystone’s James Goldstone, has taken up the mantle at the large open-ended funds Barnett used to run. But Parmar said this would not guarantee more interest in IVI, particularly if investors preferred to access the funds instead without worrying about the trust’s discount.

The broker added it was ‘disappointing’ to see such low turnout in the vote when interest in governance and shareholder engagement was generally increasing. Parmar noted there were a number of retail investment platforms on the share register – including Hargreaves Lansdown with 7.8% of the shares and Interactive Investor with 6.8% – where it can be hard for investors to vote and low turnout is typical.

While IVI experienced a bout of stronger performance relative to UK market in the months before the pandemic, over five years total returns have been flat for shareholders, as the FTSE All-Share has risen 20%. Over a decade, Mallon’s trust still beats the index, however, with an 86% shareholder total return versus 70% for the All-Share and the 79% AIC sector average. 

The trust will hereafter face a continuation vote every two years.     

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