Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Does it matter who owns the investment trust I want to buy?
I look at lots of different factors when I’m researching investment trusts and one that I’ve spotted recently is the percentage of the trust that’s owned by institutional investors. Does this hold any relevance?
For example, if one trust had 20% held by an institutional investor and another had 80%, which would be the better investment, assuming all other factors are equal? Or is this something I don’t need to factor in?
JH, via email
There’s lots of information available on investments, which can make it a bit overwhelming when doing your homework on opportunities. You’re smart to try to work out what information is useful to have and what’s just noise that won’t help when you’re weighing up investments.
Once you’ve got the basics sorted, such as the investment remit, performance, charges, the current discount, the level of gearing, etc, it can be useful to look deeper into the data to see if it will give you an edge when deciding between trusts.
One of the data points available is the makeup of the shareholders of the trust, listed on the shareholder register. This will show how much of the trust is owned by individual investors and how much is owned by large investors, such as pension funds, professional fund managers or insurance companies. Morningstar has this figure available for each trust on the relevant factsheet.
For example, five of the top 10 investors in Murray International (MYI) are wealth managers who will have put money in the investment trust on behalf of their clients, namely Rathbone, Charles Stanley, Investec Wealth, Smith & Williamson and JM Finn.
It is common to see investment platforms such as AJ Bell feature as a large shareholder in investment trusts. In the example of Murray International, investment platform Hargreaves Lansdown is the second biggest shareholder at 8.8% of the trust.
In these situations, the investment platform will represent lots of underlying DIY investors. When you buy a share via a nominee account, your investment platform is named on the shareholder register and not you.
Ryan Hughes, head of investment research at AJ Bell, says that it can be useful to look at the makeup of the shareholder base of a trust: ‘My personal view is that the more diversified the shareholder base, the better.’
He says one warning sign might be if one shareholder holds most of the shares, or at least a large proportion. ‘There is an increased risk that they could seriously disturb the share price if they chose to sell, or they could agitate for change if things are not going as they would like.’
But even if there isn’t one dominant shareholder, another warning sign could be the entire trust being owned by just a handful of shareholders, which could present the same risks.
Hughes touches on a key risk if there’s one large shareholder: liquidity. It means there won’t be many shares available to buy freely in the market, which could affect the price. But likewise, if that one shareholder decided to sell their entire stake (or a large proportion of it), that could dramatically affect the price of the trust.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, says: ‘In practice, this doesn’t happen very often. Most institutional investors are conscious of the impact their trading can make on share prices and will often space their trading out to minimise its impact.’
The second big area is the ability for institutional investors to vote for change. This could work in your favour if the institutional shareholder if pushing for change that’s aligned with your views.
Bigger shareholders stand a better chance of bringing about change as they have a large voting share. But this can be both a pro and a con, as if the institutional investor is pushing for something you’re not aligned with, it can easily vote you out.
‘There are times when an institutional investor’s goals could be different to those of private investors, for example if institutional investors wanted an investment company to wind up, but private investors wanted it to continue,’ says Brodie-Smith.
‘This is one of the reasons why it’s important for private investors to vote their shares. Institutional investors will almost always vote, so it’s important private investors do so as well to make sure their views are heard.’
DISCLAIMER: AJ Bell referenced in this feature is the owner of Shares magazine. Editor Daniel Coatsworth owns shares in AJ Bell
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