Power to the people

If you’re a shareholder in Alliance Trust or Witan, two of the UK’s biggest investment trusts, look out for some important post coming through your door any day now. The two funds announced plans for a merger earlier this year, but before that can go ahead, investors in both funds must give the tie-up their blessing through a shareholder vote. The papers are now being issued ahead of these votes over the next couple of weeks.

Clearly, this is an important moment for both trusts and their respective investors. But there is also a bigger story playing out here – the merger process is a high-profile illustration of one of the most important ways in which investment trusts offer a very different type of value proposition to other collective investment vehicles.

All such investment funds have similarities. They pool investors’ funds and are managed by professionals who build diversified portfolios with a view to generating long-term returns while managing risk. Investors pay charges for this service, but also have the option of changing funds if they feel doing so is appropriate.

Uniquely, however, investment trusts are public companies, listed on the stock market and subject to the same rules and regulations as other companies listed in that way. They must appoint independent boards of directors who have a fiduciary duty to safeguard the interests of shareholders. And they must give those shareholders a regular say on how the company is run.

It’s a distinction that can sometimes feel academic, but it really matters. Critically, investment trusts, by law, are run for their shareholders. Other types of funds, by contrast, are products that have been launched by a fund management business; their primary goal is therefore to generate revenues for that business.

Think of this in terms of whether investors’ interests are aligned with those of the professionals managing the fund. In good times, everyone does well – investors enjoy attractive returns and fund managers secure additional fee income. But what about the more challenging moments? This is when investors may want the fund to take a different course – to appoint a new manager, say, or to do something more radical such as pursuing a merger. In an investment trust, the board must pursue such options, even if doing so hurts the interests of the existing manager; in other types of funds, there is no such responsibility to act – and little incentive for the product provider to do so.

This distinction has played out in public during the challenging investment environment of the past couple of years. The first half of 2024 alone saw six investment trusts complete merger arrangements. Others have held continuation votes – giving investors the option of winding up the fund – or taken other steps on behalf of shareholders. You haven’t seen anything equivalent in other parts of the collective funds industry.

None of which is to tell you how to vote on the Alliance Trust-Witan deal. Whether they buy the case for a merger set out by the boards of the two investment trusts is a matter for shareholders.

However, it is important to recognise that events like these – sometimes perceived as a defensive response – actually speak to the health of the investment trust sector. They provide important evidence of investment trusts doing exactly what they were created to do – to secure value on behalf of their shareholders through every possible means.