Scottish Mortgage, activists, discounts, tips and ‘zero’ costs: A fun-filled 2024 for trusts!
Many of you enjoyed the short video we published two weeks ago of assistant editor Jamie Colvin discussing his generation’s views of investment trusts with editor Gavin Lumsden.
If you liked the excerpt, why not watch the full 23-minute recording from which it came? Here, the pair assess the biggest stories and events in the investment company sector in 2024. It’s been a ‘mixed year’, but they’re looking forward to 2025.
Have you read Investment Trust Insider’s 2024 Annual Review? Click here for a must-read collection of articles looking at discount opportunities, corporate governance, alternative funds and cost disclosure.
Can’t watch now? Read the transcript
Gavin Lumsden:
Hi Jamie, it’s been a good year for Citywire. In May, we launched our first investment trust fund manager ratings. So, we’ve been planning to do that for a long time. It fits in with what we do with fund manager ratings, generally at Citywire and combines nicely with the annual awards we’ve held recently. For the rest of the market, it feels like it was a lot more mixed after a difficult 2023. Why’s that?
Jamie Colvin:
It did feel pretty mixed in the investment company sector. We had those much delayed, promised interest rate cuts. Then when they did come, there was a lot of political uncertainty. Both over here and in the US. That really did knock sentiment I’d say.
Gavin Lumsden:
Talking of politics, there’s the election uncertainty as well. Both in the UK and more recently in the US. As a result, discounts are still trundling around the 14%, 15% level that they started the year on. Better than the all-time lows of the previous October. What were some of our big stories of the year so far?
Nick Train and Hargreaves
Jamie Colvin
Nick Train breaking his silence on Hargreaves Lansdown, which as we now know, has been taken private by a consortium of private equity investors.
Gavin Lumsden:
That’s a classic example where you get two big names. Not really about an investment trust. Obviously, Nick Train is the manager of Finsbury Growth & Income Trust. It wasn’t really about that, but it’s a nice example where you get two big names in the headline and you get twice as many readers.
Jamie Colvin:
Yes. He was just summing up really, that it went too cheaply. Like so many UK companies.
Gavin Lumsden:
It must be galling for Nick Train after two decades of great performance. The past three years have been difficult, going nowhere. Now, he sees one of his top holdings been taken out at a higher price than it has been trading at, but well below where he thinks it should be.
David Stevenson wrote our second most popular story. For this discussion, it was a really apposite headline that we put on it. ‘The Investment Company Bubble has Burst’, we said. What was he talking about?
Alliance Witan merger
Jamie Colvin:
That article was summing up the Alliance Witan merger and Elliot popping it’s head up in Scottish Mortgage and enforcing a buyback.
Gavin Lumsden:
What was he saying about Alliance Witan? There’s been a lot of M&A, but that was the biggest deal we’ve had so far.
Jamie Colvin:
Alliance Trust, which is managed by Willis Towers Watson, has pounced on Witan to form a £5 billion giant, knocking on the FTSE 100’s door. That was very exciting and I think a pretty good move by them.
Gavin Lumsden:
Alliance effectively won the multimanager battle. It’s proved to be the better at doing that job.
Scottish Mortgage saga
What about Scottish Mortgage? You don’t get much bigger, in terms of corporate actions, than the launch of a £1bn share buyback from a Baillie Gifford flagship responding to the arrival of Elliott, a much feared and respected activist investor. Analysts calculate that with Scottish Mortgage pledging to buy back a billion pounds of its shares over two years, which it’s already done, and it started off with a £300m buyback in a one-day record, that’s contributed to £10bn of outflows from the sector up to the end of October, which is incredible. I guess you want to know whether that actually had an impact on Scottish Mortgage’s share price?
Jamie Colvin:
Yes, that would be interesting to know.
Gavin Lumsden:
Having cued that question up, the answer is not really. The jury’s still out. I think Scottish Mortgage demonstrates the wider problem in the market, of weak investor confidence. It started off with this bazooka buyback on one day. The shares were trading around 15% below asset value. That discount’s come down to around 9%. That’s around the one-year average. What it seems to show, the shares have plunged, as you know, from a late 2021 peak of over £15. The crash to a low of 621p in May last year. Then they’ve been rallying nicely. Elliott will have captured that very well as well.
Jamie Colvin:
They did take some profits. They’re below 5% now.
Gavin Lumsden:
That’s right, they disappeared. We think they’re still there, but they’re no longer disclosed. That’s right. For much of this year, they’ve been trading between £8 and £9, unable to break through that £9. It feels like, as soon as they gain a bit, people take profits. They don’t want to crystalise too much of a loss from the peak, but they’ll take some, perhaps. Depends on where they bought in at. Since the election, they have rallied and they are trading around £9.15. So, fingers crossed. There is a fair bit of good news floating around on Scottish Mortgage and the Baillie Gifford trusts.
Jamie Colvin:
Yes. Firstly, they had that bit of trouble recently with Northvolt, the Swedish battery maker.
Gavin Lumsden:
So not all good news.
Jamie Colvin:
[5 mins] Recently, we’ve had the SpaceX tender in December, which I think, the press report suggests is going ahead at $135 a share. Trust broker, Deutsche Numis mentioned that that would value SpaceX at $250bn, which is a big increase on June, when it was held at $210bn when it did its last tender. So big increase.
Gavin Lumsden:
What’s the significance for Scottish Mortgage and the other Baillie Gifford trusts like Edinburgh Worldwide as a stake?
Jamie Colvin:
And Schiehallion, I think. The largest private holding, certainly, in Scottish Mortgage. I’m not sure off the top of my head about the other two.
Gavin Lumsden:
So, any big increase should reduce some of the uncertainty around the big-, they’ve got about a quarter of the portfolio in unquoted.
Jamie Colvin:
Yes, and validate hopefully, the other holdings, and increase in confidence in those.
Gavin Lumsden:
A lot of news around Scottish Mortgage. Elliott wasn’t the only activist in town. You actually encountered another one. Who was that?
Saba and SONG
Jamie Colvin:
I did. I met Boaz Weinstein of Saba, another US activist. Who was also in the Scottish Mortgage. I think he dove in and made a huge profit.
Gavin Lumsden:
Saba really emerged last year with stakes in lots of investment trusts. Still got them.
Jamie Colvin:
I believe so. Over 20. I met Boaz back in February. He was talking to lots of students about how he likes the UK’s Marquess of Queensberry rules. Meaning we’ve got much better corporate governance than over in the US.
Gavin Lumsden:
Good old British fair play. That’s interesting. Was he thinking of Hipgnosis Songs? That was one of the big corporate governance rows of last year. Shareholder rebellion. Then a new board come in. They cut it up pretty rough with the fund manager of Hipgnosis, Merck Mercuriadis. We’re talking Robert Naylor, the new chairman. He’d helped sell Round Hill, the other listed music royalty fund. After the sale of Hipgnosis, so they’re both gone.
PRS in play
Then he brought in Chris Mills, the leading UK smaller companies’ investor and now, they’re both on the board of PRS Reit. In a year of a lot of corporate governance action, that’s a really interesting story. We’re going to talk about my tips later on. PRS Reit was one of the better ones. What led to its share price spiking up?
Jamie Colvin:
Back in July, Sigma, who manages PRS Reit, which is a portfolio of private family housing, and the board extended Sigma’s management contract until 2029. Then it was only in August that a group of shareholders, I think about 20%, kicked off saying this was poor governance. It was likely to prevent the trust from being bid for by prospective bidders. They also said that, the chair at the time, Steve Smith hadn’t really consulted the shareholders. So, they launched a whole campaign to oust him, which they did in the end. That sparked a recovery in the share price in August.
Gavin Lumsden:
It’s starting a strategic review and a sale process and they’ve changed that management contract. So, it looks like it could also be heading for some kind of realisation.
Smithson U-turn
There was another big corporate governance row earlier in the year, with a very well-known investment trust, Smithson. Which is not managed by Terry Smith, but is run by his company.
Jamie Colvin:
Yes. Fundsmith. They’ve been going through a tough time performance-wise. They scored a bit of an own-goal when a continuation vote had been triggered by their discount widening.
Gavin Lumsden:
Quite a few trusts had that. Your shares trade more than 10% on average, over a year or so, then you have to hold a continuation vote.
Jamie Colvin:
That was in their prospectus from 2018. They didn’t do it.
Gavin Lumsden:
Why not?
Jamie Colvin:
They did say that it was to do with market sentiment at the time. It wasn’t to do with performance. Peter Spiller, among others, kicked off.
Gavin Lumsden:
Peter Spiller of CG Asset Management. Manager of Capital Gearing Trust.
Jamie Colvin:
Yes. I think he’s the longest working fund manager in the City. He’s been going since 1982. He kicked off and I went to the AGM a couple of weeks later, where there was a U-turn and they decided to hold a continuation vote following that. That was a bit of embarrassment.
Gavin Lumsden:
We should touch on the second half of the year. More recent events. Elections and disclosure reform have been dominating. Cost disclosure. Big move. Big surprise decision by the new Labour government, who’d have thought they care?
Jamie Colvin:
[10 mins] They chalked up the early win that we were all egging them on to do.
Altmann’s eye-opener
Gavin Lamsden:
Before that, we had an article by Ros Altmann, Baroness Altmann in the House of Lords, who was a leading campaigner on this issue. Do you remember the article? I thought it was pretty eye-opening. It’s basically saying ongoing charges didn’t apply to investment companies.
Jamie Colvin:
I think she stated the case quite clearly. The case being that these investment charges are already included in the share price. By including them in the key information document, the KID, investors were having to double pay costs. So, a double count. It looked like they were double paying them, but it looked like they were going to have to.
Gavin Lamsden:
It made investment companies look expensive. Institutional and wealth managers are discouraged from holding them because even though they know they make these disclosures, these are distorted, it makes their costs look high in front of their clients.
No ongoing charges applying to investment companies. I’m still getting my head around it to be honest. It’s good news, but it’s a strange concept. Although, I understand what you’ve just said. I wonder, maybe I’m not the only one. The platforms, this whole reform is going out to consultation. We’re waiting for the new rules some time next year. What’s going on between investment companies and the platforms through which investors buy their shares?
Jamie Colvin:
As far as I understand it, investment trust have to send a monthly EMT report to platforms, which will disclose their costs, the cost of buying them for an investor. So, they can just put them straight on the screen and when you click, say, Scottish Mortgage. Since they’ve been allowed to put zero, which is the AIC guidelines, for their costs, it’s been a classic case, as several people have said to me, of ‘computer says no’. These investment trusts are being barred from new investors unless they pick up the phone, but I think existing investors can still sell.
Gavin Lumsden:
The [spreadsheet] cell doesn’t like to have a zero in it.
Jamie Colvin:
Exactly. I think all these big retail platforms like Hargreaves Lansdown, AJ Bell, aren’t that keen on making all these programmatic changes when the rules aren’t even going to be written properly until a few months’ time. It’s an expensive process to change everything.
Gavin Lumsden:
I have some sympathy with them, but on the other hand, it seems to be such a big problem weighing on the sector as a whole. Investment company shares are something that they sell on their platforms, I’d have thought it would be worth pulling their finger out and getting on with it and finding some sort of solution. You’ve been chatting to Gravis who hope they’ve got a working solution.
Jamie Colvin:
I think they should be finding out any day.
Gavin Lumsden:
What do they do?
Jamie Colvin:
They have used the bid-offer spreads an investor pays when they buy shares in investment trusts, and spread that over five years and put it as the cost of buying a trust.
Gavin Lumsden:
That is an expense that investors incur when they’re buying and selling shares. It generates a figure they can put in that spreadsheet.
Jamie Colvin:
I think it’s very, very low, there are quite narrow spreads on their trust, but it should be interesting to see if that works.
Gavin Lumsden:
We’re getting a little bit technical here, but it’s a big issue and hopefully, it will get resolved next year. It’s not the only example of problems between investment companies and the platforms on which investors buy their shares. Our readers were finding it difficult to buy shares in well-known investment companies that might be trading on discounts because AJ Bell and Hargreaves Lansdown, to name two of them, were putting barriers in the way. Remind me what they were doing.
Jamie Colvin:
The recent developments for the Gravis trusts, for example, are the most recent example of a longstanding issue this year, of barring investment in trusts online. Back then, AJ Bell and Hargreaves were barring investors from trusts which had failed to complete an assessment of value form because they didn’t know they had to. They immediately blocked them and there was huge uproar there. I think Bluefield Solar’s the first one that comes to mind as a trust that was barred. I think AJ Bell outsourced its assessments of value to 360 Fund Insight, who did these quite unfair assessments, which seemed like every investment trust was bound to fail by being compared to a tracker. A tracker tracing a tracker.
Gavin Lumsden:
They weren’t comparing like with like. It didn’t seem to be a very thorough analysis. Enough regulation. Hopefully all that sort of stuff is going to get sorted out in 2025. Looking forward to that.
Risers and fallers
Sticking with this year, I’m wondering as the writer of our weekly Trust Watch, what were the biggest risers and fallers of the year so far? Take it from the top. What’s the very best one? It’s an interesting one.
Jamie Colvin:
[15 mins] JEMA, or JPMorgan Emerging Europe, Middle East & Africa.
Gavin Lumsden:
Quite a mouthful, used to be the snappier JP Morgan Russian Securities, which gives a clue as to what’s going on.
Jamie Colvin:
No surprise that it changed its investment strategy and name shortly after Russia invaded Ukraine.
Gavin Lumsden:
They had to write down a whole load of Russian assets. Moscow-listed shares. It still holds them, but at nil value and there’s been a lot of speculation that one day those will be marked up to their real value. That excitement has really risen since the re-election of a certain Donald Trump in the US because if he ends the war in Ukraine, improves relationships with Russia, maybe sanctions will come to an end. Shares in that trust have soared nearly 80% this year and can you guess what the premium is? It’s a massive premium.
Jamie Colvin:
Looking at the number here and I’m not sure I’m misreading it.
Gavin Lumsden:
358% premium. The shares are trading apparently at 358% over the net asset value. The net asset value reflects the written down Russian shares. More conventionally, there’s a beaten-up trust called Seraphim Space investing in space technology companies.
Jamie Colvin:
That’s a rollercoaster.
Gavin Lumsden:
It’s rallied 56%, but is still trading at a discount of 45%. You can see, there’s been some big rises of some previously beaten-up trusts. Some trusts are still beaten up. Regional Reit, a real estate investment trust down nearly two-thirds this year.
Then there’s the so-called battery funds although sometimes we’re talking about whether we should call the likes of Gresham House Energy Storage, these are energy storage funds, whether we should call them energy trading funds because of the nature of what they do. It’s all based around having batteries. At the beginning of the year UK revenues, trading the energy that’s stored in these batteries plummeted, didn’t it?
Jamie Colvin:
Yes, it really did and the dividends were left uncovered and cut. The boards had to scrap them all.
Gavin Lumsden:
The share prices have all collapsed and the Gresham House one is down 57% currently. Some spectacular falls from grace there.
How did the professionals do in their trust picks in the midst of all these risers and fallers?
Jamie Colvin:
Good question. I was having a look and one of them that was interesting was Peel Hunt, the broker, picked out Chrysalis twice this year. Going into the year and then when the private equity fund passed its continuation vote, which I think was around April and promised to change the fees and make better shareholder returns to shareholders. ie, buybacks and so on. Since then, things looked to be pretty good straight after that continuation vote. Asset Value Investors, which has got two well-known trusts. AVI Global and MIGO Opportunities, jumped in with £42m invested in Chrysalis.
Then things took a knock mid-year, when one of the major holdings, WeFox, insurance company ran into some trouble and they had to write it down by 54%. Since then, things have improved. They’ve made two exits and Klarna, one of their major holdings, has finally said it was planning on listing in the US in the New Year.
Gavin Lumsden:
Massive spike up in Klarna. A couple of years ago they sent shares in Chrysalis to all-time highs and then caused problems when the manager’s big performance fee on those uncrystallised gains and then as soon as they had pocketed the money, basically Klarna’s valuation was cut. There’s no conspiracy going on there, but it was a bad outcome for shareholders.
Jamie Colvin:
It really was. Things are looking up. The shares are up 23% year-to-date. The discount has come in from an almighty low of 53% which I think was back more in last year’s October lows. It’s now at a very affordable 34%.
‘Buys’ and ‘holds’
Gavin Lumsden:
Do you want to know how I’ve been getting on with my tips? I’ve been writing for the Telegraph once a week on their investment trust column and we republish the articles on our website. Chrysalis is one of my successes. Following in from Asset Value Investors at the beginning of the year. It was up about 10% when I got round to publishing something on it. It’s been an interesting experience.
I’ve been fairly liberal with my ‘buys’ and ‘holds’ and positive things because there’s so many investment company shares trading on wide discounts. If you think they’re any good, then that should narrow, but it’s easier to anticipate that then to actually see the share price always move up.
[20 mins] If I’ve written 43 articles, which I do think I have, 20 are flat. 20 have basically gone nowhere. Obviously, some of these are written quite recently, but some are going up to about a year ago, so that’s kind of galling. But I think I’ve had 14 hits where there’s been big gains. PRS Reit that we mentioned earlier is my best one. Law Debenture, that was a pre-existing tip. I can’t say it was my idea, but a good UK equity income trust. Edinburgh Worldwide’s up nicely. We were talking about SpaceX and other excitement around that. That’s the Baillie Gifford global smaller companies trust, that’s been doing well.
So, I’ve had some successes, but some of the misses are revealing. Like infrastructure has done poorly for me certainly. Obviously, it’s the timing of these things. It doesn’t mean the falls I’m experiencing in my articles isn’t necessarily what people are experiencing year-to-date or anything like that. It I surprising seeing Renewables Infrastructure’s [TRIG] down 12% since February. Obviously, interest rates aren’t coming down as soon as those infrastructure funds would like. A surprise.
Jamie Colvin:
They don’t like to call themselves a bond proxy, but I know that gilt yields are still looking pretty attractive.
Gavin Lumsden:
That’s it, they’ve got massive competition from government bonds in terms of the income. Income, appealing to older, retired investors in particular. Younger investors probably preferring growth and capital returns.
Looking at you now, just thinking of winding up this conversation. You’ve been working with me for nearly three years covering investment trusts, you’re 28. Possibly unusual a 28-year-old spending so much time looking at investment trusts. How are you finding the sector?
Gen Z and trusts
Jamie Colvin:
It’s very interesting. It’s funny you say that, I’m probably one of the few under 30-year-olds who knows what an investment trust is. Certainly, none of my friends know what they are. I’ve been finding it a pretty fascinating experience. I think it’s excellent being able to cover everything from investing in space to investing in China to investing in renewable infrastructure.
Gavin Lumsden:
There’s a huge variety of asset classes and markets you can access. That’s been the case ever since F&C launched over 150 years ago. The profusion of legacy, funny, old-fashioned names that goes along with these successful investment policies. Does that appeal to a younger generation or just turn them off?
Jamie Colvin:
I think they’re just words that would fly by and you think, what on earth does Scottish Mortgage mean or Mid Wynd?
Gavin Lumsden:
It’s a street in Dundee, isn’t it?
Jamie Colvin:
That’s what I’d read since. I think they understand what Nvidia is and Bitcoin and that’s what they’re interested in. I see it as my job to spread the good word about the investment trust sector to people my own age.
Gavin Lumsden:
How we feeling about that at the moment? It’s been a mixed year, but some confidence in the outlook for 2025.
Jamie Colvin:
Yes, a buying opportunity.
Gavin Lumsden:
A buying opportunity. Is that what you’re telling your friends?
Jamie Colvin
That’s what I will be telling them, yes.
Gavin Lumsden:
Jamie, it’s been a pleasure to work with you this year. It’s been fun.
Jamie Colvin:
You too, Gavin. Thank you.
