Ian Cowie: the damning data behind trust mega-merger

Independent directors, with a fiduciary duty to represent the interests of all shareholders, are often said to be one of the ornaments of the investment trust industry, setting it apart from other types of pooled funds. Now, a City shouting match suggests that it might be possible to have too much of a good thing.

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If the proposed £6.2 billion merger of HICL Infrastructure PLC Ord (LSE:HICL) and Renewables Infrastructure Group (LSE:TRIG) goes ahead, the combined entity will have no fewer than 11 directors initially.

Before your eyes glaze over, let me point out that between them, these directors were paid a total of £957,500* in fees over a year, as per Investec’s latest Skin in the Game report.

Even by the standards of the Square Mile - no joke intended - give or take £957,500 here or there, and pretty soon you are talking serious money.

Sad to say, the combined wisdom of these board members hasn’t translated into many happy returns for shareholders.

To be specific, HICL achieved a near-zero return of 0.4% over the last year, following a loss of 12% over the last five years and a meagre positive return of 25% over 10 years, according to independent statisticians Morningstar. Meanwhile, TRIG lost 10% over one year, following a loss of 17.8% over five years and a positive return of 40.8% over 10 years.

To put those numbers in perspective, the average returns from more than 300 investment trust members of the Association of Investment Companies (AIC), over the same periods, were 14%, 31.4% and an impressive 141%.

No wonder HICL shares are currently priced 28% below their net asset value (NAV), and TRIG trades at a 32% discount, while the average for all AIC members is half as wide at 14%.

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The good news, at least for the lucky directors recommending this merger, is that most of them haven’t suffered too much from the disappointing performance of these investment trusts. Only one of the seven board members at HICL appears to have invested more than a single year’s fees in the shares of this fund, while none of the five directors at TRIG has done so.

Against all that, the Skin in the Game research also shows that the fund management teams at HICL have a total of £11.7 million invested in this trust, while the fund managers at TRIG hold £14.5 million in these shares. Both trusts are managed by InfraRed Capital, a subsidiary of the Canadian giant, Sun Life Financial.

To be fair, it isn’t the fault of the directors at HICL or TRIG that total returns from these funds have fallen below the AIC industry averages.

Both funds deliver above average dividend yields, paying 7.4% and 10% respectively. Unfortunately, those yields were made to look less attractive - and, thus, less valuable - by interest rates remaining higher for longer than expected elsewhere.

An idiotic windfall tax on all forms of energy extracted from the North Sea also hit TRIG hard, because of its focus on offshore wind farms.

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HICL’s more diversified portfolio - whose assets include hospitals, the Royal Military School of Engineering and the Home Office building - diminished their exposure to the windfall tax and increased the anger of some HICL shareholders about the proposed merger.

TrinityBridge, which owns 3.8% of HICL, is the largest shareholder so far to come out against the deal. W1M Wealth and Investment Management, with 1.9% of the equity, and Hawksmoor Investment Management, with 0.7%, plus EQ Investors with 0.5%, also oppose the merger.

More positively, if this deal goes ahead, the combined fund would have assets of £6.2 billion and probably gain a place in the FTSE 100 index of Britain’s biggest businesses. The deal should also cut costs, which marginally exceed 1% per annum at both trusts, and raise the profile of the enlarged company, possibly increasing demand in a deeply depressed and unfashionable sector.

Buying low can often - but not always - prove to be the first step towards making a profit, so the proposed merger of HICL and TRIG might attract the attention of adventurous investors. It is possible that current prices could prove to be bargains for the brave, especially if interest rates trend lower, making high-yielding trusts more attractive.

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However, it’s only fair to admit that I intend to continue obtaining my exposure to renewables via Ecofin Global Utilities & Infra Ord (LSE:EGL), which is the sixth most valuable holding in my forever fund, Greencoat UK Wind (LSE:UKW) and International Public Partnerships Ord (LSE:INPP), which have beaten HICL and TRIG over the usual periods for comparison.

No doubt both boards of directors will be receiving lots of expensive advice about the proposed merger, but here’s a handy hint, gratis.

If the directors want to persuade investors that this deal makes sense, why don’t they buy some more shares? That way, they would experience ordinary shareholders’ pain or pleasure, whatever happens next.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Ecofin Global Utilities and Infrastructure (EGL); Greencoat UK Wind (UKW); and International Public Partnerships (INPP) as part of a globally diversified portfolio of investment trusts and other shares.

*Figure taken from Investec’s Skin in the Game report, which lists 12 directors.