Deleting all my social media

Deleting all my social media (the last one over two years ago…) seems insufficient, as if a lot of journalists’ work is now just reporting on what’s being said on social media. The investment trust sector is currently awash in its tidal wave of news, seeping out across social media, and I wouldn’t blame our readers if they’d been steering clear of the whole thing. But I think this does matter in a big way, and investors should pay close attention. I’ll do my best, but I’m not the best at keeping it short, so hang on.

According to Page 1 of Chapter 1 of “The Activist’s Investment Trust Handbook,” the easiest shareholder vote to win is that of a vote to replace the directors. Other methods of gaining control of an investment trust all require (more) cash, more votes, or all of the above. The process of removing and appointing directors, however, is done by simple majority vote, and once a new board is installed, everything else follows. So, effectively, the current vote is whether to facilitate the ability for a minority shareholder to take control of European Smaller Companies Trust (ESCT) (and also six other trusts), via a completely legal vehicle. The sapphire proposal replaces the board with two directors, one an employee of the minority shareholder group and the other an independent director proposed by that same shareholder. To remain compliant, it’s expected that one or more new independent directors will be appointed soon after. And wouldn’t it be fun to be a fly on the wall for the interviews for new directors? And, I might add, perfectly legal. Investment trusts are the most tightly controlled of fund structures, and in being so, would always be able to find loopholes such as this, and I’m not sure anyone would want to change that, however uncomfortable it is right now. So the burden is on shareholders to recognize restructuring for what it is: a loophole being manipulated to serve a minority shareholder’s interests.

I don’t want so much to enter a dispute over who has done better and by how much and for how long, which is the essence of a good deal of the commentary and readily accessible elsewhere. To me, it is a red herring.” The persistent implication of the minority shareholder proposal is that ESCT is in for a radical change of investment strategy with no guarantee that investors who don’t want this will be allowed to exit with a graceful exit at NAV.” Comparing funds is an irrelevant distraction when the fundamental investment strategy was unique and presented over a selected timeframe. A US equity fund doesn’t revise its mandate to European equities because one has outperformed the other for a year or two, or vice versa. If you're going to call yourself The European Smaller Companies Trust, then I reckon you can safely work on the assumption that your shareholders know what the heck it is you're doing. This means the annual report will not field any surprises. That’s assuming shareholders read all the current documents and vote, because if they don’t, next year’s annual report could bring them quite a shock. Because, as we know, retail investors have a low turnout rate and therefore a minority shareholder with c. 30% of the shares likely has a much larger percentage in a low turnout vote Which leads to the possibility of minorities being able to command the majority, and suddenly everyone figures out how the loophole works.

And this, gentle reader, is why there are so very many press releases and social media posts imploring us ever so kindly to ensure that we vote at the upcoming meetings. At the bottom, we’ve compiled a few links for readers to the information specific to ESCT and the other six trusts who are getting involved, along with some broader information on what to do to make sure one can vote.

Without going too deep into the topic, there are some interesting bits about ESCT in particular that I want to share (not that I think comparisons of performance with entirely different strategies are very meaningful). I think I can trust our readership to understand that our annual ‘analysts top picks’ that we released over the Christmas break is, largely, one big end-of-year joke, and I also trust them to realise that nobody can consistently predict out-performance 12 months out. But I did select ESCT this year because I believe the manager has done a pretty remarkable job over the past few years, even though Europe, like the US, has experienced performance being concentrated in a small group of mega caps. Clearly that hitting broad capitalisation indices, ESCT performed better than the large and small cap index. So ESCT shareholders have retained exposure to small caps’ historical tendency to beat large caps without missing out on broader market performance. Over the last five years, ESCT’s NAV total return is c. 51%, compared to c. 23% for the MSCI Europe ex UK Small Cap index. The MSCI Europe ex UK’s large cap equivalent is c. 36%. So ESCT could have provided returns half as good as it has and still be outpacing the small-cap index. Instead, it’s far ahead of the large cap index during a period where the wind has been at the back of the index and in the face of small caps. Those numbers are as of 14/01/2025,

The per-share total return in the same period for ESCT is c. 64%, and I don’t think it’s unreasonable for the minority shareholder to claim that the discount narrowing, which has sent the share price soaring, is a direct result of their actions. But an outcome where a minority shareholder imposes a radical change in investment strategy upon other shareholders doesn’t strike me as a surefire recipe for that discount to remain narrow for long, and I have a hard time seeing why there wouldn’t be a post-transaction rush of sellers. There is already a proven path, for there to be a new fund manager with broad presence in the investment trust sector that is much more thorough in its scrutiny and much more full in the documentation of track record and investment strategy and during the lull in new IPOs that we have seen over the last couple of years all of the instruments to provide the retail investor with access to new trust launches have been put in place. There’s nothing preventing anyone else from being able to launch a new trust structured around the same strategy that is being promoted here, other than the barrier that everyone issuing an IPO has to overcome: the need to put together a pool of investors that want to own the proposed trust.

To finish on ESCT, which I think meets all the criteria that investors look for. It’s a specialist mandate that certainly benefits from the advantages of the closed-end fund structures when holding less liquid assets with the ability to generate excellent returns, using gearing and I think it’s recognised enough by investors that on occasion a discount to NAV is the cost of carrying a portfolio through good periods and less good periods. ESCT’s market cap, £720m, puts it in the FTSE 250, so it is big enough for even the most insatiable investment trust investor. Furthermore, and even more importantly, ESCT has a well-fitted mechanism to its strategy in the form of a three-yearly continuation vote. The next one will be due later this year, and so the present proposal adds cost and administrative burden to other shareholders when there’s already a process in place by which all shareholders have a chance to make their views known. I believe the possibility of M&As and any number of types of corporate manoeuvres is one of the unsung advantages investment trusts have; after all, these are pure capitalism vehicles and should flourish under the adjoining regimes. The rules in this case allow everyone to vote, and so all our readers who have skin in the game must do so.