Watchful institutions today in investment trusts

Retail shareholders, known in marketing jargon as the Direct to Consumer (D2C) segment, are growing in number as a result of pension deregulation, the simplicity and tax advantages of ISAs and SIPPs and the growth of easy to navigate platforms. Unlike hobbyists of old they are less driven by price anomalies and trading opportunities, and more long term in their thinking, building retirement savings over the longer-term.

At the same time, because so many investment trusts are constituents of stock market indices, index funds have grown to dominate the ranks of institutions that still own investment trusts, measured by ownership weight and buying liquidity. Because their buying and selling is effectively automated, driven by market movements, unlike other types of investor their trading activity is beyond the scope of boards to influence directly.

A small number of multi-asset institutional investors still own shares in some trusts directly, usually for specific sector or geographical exposure. Traditional institutional investors, however, such as councils, corporate pension funds and insurance companies, are no longer active or even present in the sector. A final group to consider are what can broadly be described as activist investors, which seek to make money by building a stake in a poorly performing trust and then agitating for change.

Altogether we have identified 33 investment institutions which own more than £50 million of investment trust shares. The top ten alone were responsible for 30% of all sector buying in 2020.

These investors conduct trading through the institutional market, whereas other participants, typically trading in smaller parcels, will trade through retail sales platforms (RSPs) that were originally pioneered by Winterflood Securities.

Institutions remain disproportionately influential in corporate governance matters because they vote regularly (unlike retail shareholders). Their buying and selling can significantly affect share prices and discount movements in the short term. Because they have so many competing options, and greater performance pressures of their own to face, they can no longer be relied upon to be a long term source of share register stability.