Keep calm and carry on?

It’s something that no other collective investment fund would ever do. Essentially the board is asking investors whether they are happy with the way their money is being looked after – or whether they’d like it back so they can give it someone who they think might do better job.

Around 20 investment trusts are due to hold continuation votes over the next few months. You can find out about them through your investment platform. The AIC has some useful instructions here.

Some funds hold such votes every year as a matter of course, while others work to three- or five-year timetables. Occasionally, a continuation vote is announced outside of such a schedule – perhaps because shareholders have pushed to be given a say, for example.

You might ask why investors who are disgruntled with a fund don’t simply sell up and move on. Often, the answer is that they feel uncomfortable divesting when shares in the fund are trading at a significant discount to the value of the underlying assets. A wind-up of the investment trust enables them to get their money back at closer to full value.

A period of wide discounts across the investment trust sector can therefore lead to a spike in the number of continuation votes being held – and in the number of instances of shareholders deciding they want their money back. This is one reason why we’re seeing a significant number of votes right now; factors such as stock market sentiment in the UK have resulted in many trusts slipping to wider discounts over the past few years.

Continuation votes can sometimes get heated. Trusts may be trading at wide discounts for reasons beyond their control – such as a shift in sentiment – but still have strong prospects of good performance over the medium or longer term. That can pitch groups of shareholders with different ambitions and time horizons against one another.

In other cases, investors may feel that the manager of the fund has done a poor job and that problems cannot easily be remedied. Or they may simply decide that the trust is no longer fit for purpose – perhaps it is too small to be economical, or its original investment mandate now feels out of date.

Either way, continuation votes give an opportunity to shareholders in investment trusts to hold the management team and the board to account. And not only at the time of the vote. Managers and boards who know they will eventually face the verdict of shareholders have an incentive to take action well before a continuation vote is due. For example, share buybacks can help reduce discounts, fee reductions can appease disappointed investors, new managers can be appointed to reinvigorate performance.

This is why continuation votes are a healthy concept. Long before investors are debating whether the trust’s time is up, managers and boards should be thinking about how to give them a reason to vote to carry on. If they respond to investors’ complaints and disappointments in the right way – or avoid those problems in the first place – they will very often get approval to do so.