Sharesify podcast with the AIC’s Nick Britton

In the latest special edition of the podcast, the team welcomes Nick Britton, Research and Content Director at the AIC (Association of Investment Companies). With his wealth of experience, Nick discusses investment trust trends, discounts, activists, dividend heroes and much more.

First, we get an insight into the AIC’s vision and how it aims to help investors. Nick also runs through what sets investment trusts apart from open-ended funds and ETFs and their overall appeal.

Next, our guest talks through some of the many interesting trends within the sector, including premiums and discounts and the notable rise in activism, not just from outsiders like Saba but also from insiders like AIC members MIGO Opportunities (MIGO) and Achilles (AIC).

Nick believes activism can be a force for good. He points out that Saba’s campaigns have actually driven an increase in retail investors voting their investment trust shares, and also walks us through some of the free-to-use screening tools on the AIC site.

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And if you are a company, a fund or investment trust and you’d like to come on the podcast, tell your story and expand your retail investor base, here’s your chance. Just email us at editorial@sharesify.com and we’ll do the rest.

Transcript

SPEAKER_00 0:04

Association of investment companies. Nick's got a wealth of experience and we'll be discussing investment trust trends, discounts, activists, dividend heroes, and much more. Nick, welcome to the show.

SPEAKER_01 0:15

Thanks, it's great to be on.

SPEAKER_00 0:17

Excellent. Now the AIC is more than just an association of investment companies. Can you tell us about your vision and how you help investors?

SPEAKER_01 0:25

Sure. Well, our vision is for investment companies or investment trusts to be understood and considered by every investor. We really are big believers in investment trusts at the AIC. Most of my pension is invested in investment trusts. The same goes for lots of my colleagues. But we also are aware that investment trusts traditionally have always been bought rather than sold. So they don't have big marketing budgets behind them. They don't run big ad campaigns normally. And so, you know, we also exist to promote investment trusts and just make sure people have them on their shopping list as potential investments. They won't be right for everybody, but they will be right for quite a lot of people. Probably the main way we help investors is our website, theaic.co.uk, um, which is is there to help you really research investment trusts and think about which trust might be the right one for you.

SPEAKER_00 1:19

That's that's really helpful. Uh, what do you think makes investment trusts more appealing for retail investors to say, you know, they're open-ended counterparts, ETFs, et cetera?

SPEAKER_01 1:28

Yeah, I mean, there's a lot of choice out there now. And, you know, to be honest, open-ended funds and ETFs can be very appealing investments. Um, but you know, we do think investment trusts have got some advantages over them. So, for example, the income advantage. Investment trusts can reserve income to pay out in a future year, and that means they can raise their dividends more smoothly year after year. We've got the dividend hero investment trusts that have raised dividends for 20, 30, 40, 50. We've even got one getting near 60 years in a row, uh, City of London Investment Trust. So that's one advantage. They've got strong long-term performance. If you compare the performance of investment trusts with similar open-ended funds, very often over the long term they outperform. Um, they have independent boards of directors who are able to look after shareholders' interests and sort of fight in their corner, if you like. And um, the the fourth thing would be that they can invest in a much wider range of assets than ETFs or open-ended funds, including things that are really hard to buy or sell, like uh physical property, infrastructure, renewable energy assets, private equity, and so on. So there's just a great, much more of a range of things they can invest in. So I think those would be the key advantages that investment trusts have over other kinds of funds.

SPEAKER_02 2:39

Yeah, fascinating. Um, there's there's been quite a lot of change, hasn't there, Nick, over the last decade in this sector? Um, in terms of kind of people coming to market, launching new trusts, um, trends in discounts. Now we've had activists come in as well. So, I mean, what are what are the sort of main, what are the main concerns if you're managing an investment trust today, would you say?

SPEAKER_01 3:01

I mean, you're right, there's been a lot of change, um, probably dating from end of 2021, beginning of 2022, when interest rates started going up. We had a low interest rate environment for such a long time, a lot of trusts launched during that period, that to be honest, when interest rates went up, demand fell for those trusts because the yields weren't attractive enough to compete with bonds and cash. And it's really as simple as that. And we've been fighting against that ever since. We've also had the outperformance for a long time, it's going away now, but the outperformance of the Mag 7, uh, things like that's not great for investment trusts. Um, so had a number of headwinds. Um, discounts are still pretty wide, they're still double-digit on average, um, whereas last decade, you know, they were tend to be single-digit discounts. And and boards sort of responded to that um by a record share buybacks. We saw 10 billion pounds of shares being bought back last year. That was a record. We saw 27 deals, um, by which I mean liquidations, uh, mergers, or acquisitions, trust being taken off the market. Um, so it's been a time of great change. It's been an unsettling time uh for boards and managers, but I think that the message that's coming out of it is um that you need to really know your markets. You need to know what your trust is there for. Is it doing a good job? And if it is, people still want it, great. Um, if not, then you know you have to think about a radical change. I mean, it could be uh a change of manager, uh, a merger. Trust can do these kinds of things, or even wind up the trust if it's if it's not um fulfilling any useful purpose because it's a Darwinian sector uh and it always has been.

SPEAKER_00 4:40

Yeah, that that's really useful. The last year or so have seen that notable rise in activism, um, not just from the outsiders like Saba, but also from institutions, even insiders like MyGo. Um, can activists be a force for good, do you think?

SPEAKER_01 4:53

Yeah, they certainly can be a force for good. Um look, the AIC is not anti-activist at all. As you said, we've got activists who are our members, we've got MyGo, uh, we've got Achilles Investment Company, we've got AVI Global, we've got loads of activists who are our members. So nothing wrong with activism, and it can be a force for good. I think what we've seen with Saba, though, has been quite different. So rather than trying to kind of put forward an alternative proposal for an investment trust and get other shareholders behind that and persuade people that's the right way to go, what they've done is really created the maximum amount of disruption they can. They've repeatedly put forward repetitive, you know, similar proposals where they've already been rejected. Um and they've sort of really kind of ignored um the wishes, the express wishes of other shareholders. Um, so I think that you know they are exploiting gaps in the rules. You know, they're following their own self-interest, they're entitled to do that. But you know, smaller shareholders do need to be protected. And it's just not really a fair fight where you've got a 30% shareholder um versus, you know, 10,000 retail investors, many of whom don't vote. Um, so you know, the we've got to address that situation. We've asked the FCA to look at it. There are things that can be done that will actually rein in um tactics like Sabah's without actually neutering activism, which nobody wants to do.

SPEAKER_00 6:15

Right. Okay. Now that that leads on nicely actually to AGMs, EGMs seems to be a bit of the thing of the past, but can be done to encourage retail investors to vote their shares, especially when their votes can be you know crucial in determining the future of a trust.

SPEAKER_01 6:28

They can. And I will say one thing for Sabah. Um, we struggled for a long time to get people interested in voting and shareholder engagement. But if there's one thing that has got people a lot more interested, it is SABA and their actions. Um, so so voting rates have actually gone up. So we we we do a um a survey. Um two years ago, 38% of people said they sometimes voted their investment trust shares as retail investors. That's gone up to 49% who say they do it sometimes. Um, confession time. I didn't always vote my investment trust um shares on routine AGMs. Now I do. I vote every single one out of principal, and I think you know others should do the same. Uh platforms are making it easier now, they're sending out more notifications about votes. Um, but we need to do more. So, you know, we're asking for voting legislation to be put in the king's speech. So it will be digital. It needs to move into the digital age, you know, sending letters to people that should be a thing of the past. It's expensive, it's slow. When you've got campaigns like SABA's, uh, you know, we need to be able to move more quickly. And we need to make sure that investment trusts have got people's email addresses so they can contact them when they need to.

SPEAKER_02 7:35

Um, yeah, actually, Nick, just um thinking, going back to discounts. So people are new to the sector, um, you know, a discount and asset value simply means that the price of the trust is trading less than the value of the overall portfolio. And as you say, discounts have moved out on average to sort of double digits. But there are some interesting trends within that, because some trusts are actually trading at a premium and are able to issue shares, and some are at quite wide discounts, kind of renewables and some private equity stuff. Um, just talk us through a little bit of that, if you wouldn't mind.

SPEAKER_01 8:08

Sure, you're right, there's a big dispersion. So, for example, the loans and bonds sector is trading at a 1% premium. We've got investment trusts in that sector issuing shares and have been issuing shares for quite a long time. Whereas in the renewable energy infrastructure sector, that's trading at a 31% discount. And nobody's issuing any shares, in fact, they're buying back shares. So, so why is there such a big difference? I think discounts change over time because of investor sentiment. Uh, sentiment has been poor towards renewables for a number of reasons, which we don't have time to kind of go into the nitty-gritty of. But um some of it is to do with sentiment. I think if there is a simple way to explain the trends at the moment, it's that investment trusts that invest in liquid investments, so stocks and shares, things that are market traded, things that are priced all the time, tend to be trading at narrower discounts. And investment trusts that invest in less liquid assets, like renewable energy, private companies, and so on, tend to be trading at much wider discounts. That seems to be the trend at the moment, but these things can change. And wide discounts can present um really interesting opportunities, but of course, you have to do your homework and not just invest in something because it's on a big discount.

SPEAKER_02 9:16

Yeah, yeah, and a high yield. And actually, that leads on to nicely to ask a final question, which is um, you've got quite a lot of research tools for investors on the website. Um, famously, I mean, we've mentioned dividend heroes, um, and that's obviously hugely popular. I'm a big fan of your income finder as well. So, um, how can these help investors?

SPEAKER_01 9:38

Sure. Well, if you if you're listening to this and you haven't been on our website yet at theaic.co.uk, I would encourage you to go on. Probably the best place to start is a tool called Compare Investment Companies, um, which I use myself pretty much every day. Um, and that enables you to quickly find investment trusts that you're interested in, or to filter the investment trust universe. So you can find, for example, investment trusts that invest in European smaller companies, or investment trusts with a yield of more than 5%, or investment trusts run by a certain management group. There are lots of ways to filter, but it's very easy to use and you can quickly compare. You can look at discounts, you could look at performance, yield, all that kind of thing. So that's great, and that's easy to get started with. The income finder you've mentioned, Ian, really glad that you're a fan of that. It's a bit more sophisticated. You'll need to create a login to use it. All of this is free, by the way. We'll never charge you for it, but you need to create um an account, a login, and then you can use that to create a virtual income portfolio of income-paying investment trusts and to see how the dividends would be distributed throughout the year. So we we initially launched it for people who wanted to use investment trusts to provide income for their living expenses, but smooth that income throughout the year, and that's what it hopefully um enables you to do.

SPEAKER_02 10:55

Yeah, I have to say I find it a fantastic tool, and it's uh it's one I've really taken to heart myself, and and um I'm a regular kind of I'm regularly looking at that. Nick, that's absolutely brilliant. Um, and as Nick says, if you like to explore these tools and learn more about investment trusts, head to theaic.co.uk. Couldn't be easier. Um, also, if you're managing an investment trust for a fund you'd like to come on the show, um, just email us at the usual address uh editorium at sharesify.com. We'll do the rest. Thank you very much, Nick, and thank you for exchange.

SPEAKER_01 11:30

It's a pleasure bye.

SPEAKER_02 11:33

Bye.