Alexander Denny on Discounts, Activism and the Modern Investment Trust Board

Ralph Grayson

Welcome to The Boardroom Path by Sainty Hird & Partners. I'm your host, Ralph Grayson, a partner in the board practice. In this series, we'll offer practical steps and useful perspectives for aspiring and newly appointed NEDs. Throughout its 30 year history, Sainty Hird has recruited senior board members across the City, Industry, the Public Sector and NGOs.

We're now also evaluating those boards, as well as coaching and mentoring those seeking to transition from an executive career into the boardroom. So we'll be speaking to some leading figures in the board advisory and NED world. Specifically, we'll seek their counsel about how and where to spend time and energy to make an effective transition into the boardroom. The goal is to equip recent and aspiring NEDs with tips, tactics and strategies to be most effective and build a successful career as a board director. In the process, we aim to help you to think more about who you are, how you operate and how you can make this work in the boardroom. Alexander Denny, my guest today, is an accomplished senior executive with two decades experience in investment trusts, private wealth, and global markets. He has a proven track record in delivering sustained growth, leading digital transformations, and implementing innovative strategies.

He's an active non-executive director at Margaret's Fund Management, the Association of Investment Companies, and the University of Sussex Students Union, as well as Aurora UK Alpha PLC. He's a trustee of the Nautical Archaeology Society and previously headed investment trusts at Fidelity, where he focused on global equity markets and was a managing director at Pantheon delivering private equity, private credit, and infrastructure investments. Alex has recently concluded his work as a commissioner on the IOD commission, which has refreshed the role and nature of NEDs and governance.

Alex, it's a real pleasure to have you on The Boardroom Path.

Alexander Denny

Thank you, Ralph.

Ralph Grayson

You've spent over two decades in global markets working across private equity, credit, and infrastructure and now through your portfolio of non-executive roles, you sit directly in the boardroom of investment trusts and related organisations.

What makes this conversation particularly timely is increasing scrutiny on those boards. We're seeing persistent discounts across the sector, rising activism, and growing questions around whether boards are doing enough to represent shareholder interests. So for listeners, many of whom are either on boards or thinking about board roles, this raises a very practical question.

What does it actually mean to be a non-executive director of an investment trust today? And is it still an attractive and meaningful board career opportunity? Fundamentally, it seems to me that an investment trust board is no longer a role around passive governance, but it's an active test of judgement, accountability, and willingness to challenge under pressure. And that's what I'm particularly looking forward to exploring with Alex today.

So perhaps, Alex, we can just start with your personal career within the investment trust and investment company sector and talk a little bit about your evolution from an executive to a non-executive role.

Alexander Denny

Yeah, very happy to. Perhaps we'll do the slightly obsuse thing and start at the end. And I say that because I find myself looking at the pad in front of me which says Apax on it. And I was briefly a non-executive director of Apax Global Alpha, which was a private equity focused investment company, domiciled in Guernsey, but managed not at all far from here out of London and is no longer an investment company because it was taken private.

And I think it speaks to some of the issues you just raised because my career as a NED within that company was quite short-lived because it is no longer an investment company. And I was brought onto the board at a time of strategic challenge for the company. It was trading at a very significant discount. I think it had been over 40% discount to its NAV, for quite some time. Had a new chairman, Carl Sternberg had joined, and he was tasked by shareholders, I think, to find a solution to a number of the problems that the company was facing. And I was brought onto the board. It wasn't long after I had finished with Pantheon, so I had experience with private equity investment trusts. I had experience with the secondary market of the underlying portfolio of assets or, similar type situations.

When I was brought on I think primarily, actually, I was asked to join because of experience dealing with retail investors with the marketing of investment trusts and the promotion of, the sector and our hope was that we would be able to find buyers stimulate demand and therefore that we would address the discount that way. But through a combination of factors, I think many of which were external to Apax itself, it became apparent that the sort of effect we would have by simply stimulating demand would not be significant enough to narrow that 40% discount to deliver the sorts of returns the shareholders were after, particularly given the fact that the portfolio over the years had provided value but most of the growth that had been achieved in the underlying portfolio had been taken away from them in the widening of that discount.

We then started seeking strategic solutions by which I mean, we went into a period of strategic review. We were looking for buyers for particular parts of the portfolio, seeing if we could sell some of the portfolio, perhaps reinvest the returns of that to narrow the discount and as it turned out through that work, we attracted a an offer for the entire portfolio. And then we were left with the decision to make, is it right to recommend to shareholders that they take the offer that's on the table? Which was a significant premium to the, share price at the time, but still a discount to NAV.

But realistically, the price being offered was better than anything that we were going to be able to achieve by and certainly had less uncertainty in the possible execution of the deal to take that company private, to return capital to shareholders. There was a rollover option for those who wanted to remain invested, which I think was a very nice thing to be able to offer.

So we weren't forcing people to take the money off the table. They could remain in the vehicle provided they were able to own a private equity vehicle and therefore hold the company at NAV. But it meant effectively that I put myself out of a job and Carl put himself out of a job and Carl, likewise, was not on the board for very long. But the idea that you go on to an investment company board and you're going to be the steward of those assets for nine years and then roll off because the 10-year-old's required to roll off just isn't right anymore, given the level of consolidation, the discounts which persist and the expectations of board directors to do the right thing by shareholders.

Which I think is quite different to where things were at the beginning. So sorry for starting at the end, but I though that was a useful touch on.

Ralph Grayson

Just a little bit about your root into going from fidelity into a plural career? And maybe a little bit about that journey and that narrative.

Alexander Denny

So my career at Fidelity started effectively within the retail platform business which was a useful place to start for my career. I did various things, including running the complaints team at Fidelity for some time. So I was quite used to dealing with retail shareholders and actually quite disgruntled retail shareholders, and turning those stories around.

But through a series of developments at Fidelity, I moved into a project and programme management role. Which actually came out again from the idea of identifying trends, what is it that upsets customers in general? And this wasn't generally around investment points. It was to do with kind of service and, how well was Fidelity doing at dealing with people's accounts.

And where we would see complaints rise, we thought, "Well rather than just addressing that particular individual's concern and trying to fix it, we should go in at the more fundamental level and try and improve the service levels where we see these trends." So we developed a process improvement team, and one of the things years ago that used to really upset customers at Fidelity was the investment trust share plans. We had five investment trusts at the time. There's six, I think, at Fidelity now, because under my tenure, we brought on a sixth one. But there was a whole series of accounts that were outside of Fidelity's normal systems and they didn't have the same online views, the same dealing capabilities, and people could never understand why they had to send their dealing instructions to different places and it just caused shareholder discontent.

And also actually was a cost to the investment companies themselves and one of the reasons why share plans in general were closed down was because they were paid for out of the NAV of the investment companies and for the shareholders, institutional shareholders, for example, who weren't participants in the share plan, they always felt slightly aggrieved that they were paying the costs of other people's accounts.

So we closed down the share plan and moved it to Fidelity's core platform and in so doing, we created the share dealing programme for Fidelity for the first time. And that meant that we were then able to offer other people's investment trusts. So Fidelity started offering JP Morgan and Aberdeen Trusts et cetera and then actually having done that, we realised, there's no reason why we couldn't trade Marks and Spencer shares or BP shares. So we opened up Fidelity's brokerage to retail investors for the very first time off the back of that work.

A couple of years later a role came up in the investment trust team and I somewhat jokingly say that I was tapped on the shoulder to join the investment trust team because I was the only person within Fidelity's platform business who really knew what one was. So I suddenly found myself looking after the boards of the investment trust as a client director role and engaging with things much more on the investment side and over the years, I quite enjoyed investment companies, though it was an interesting part of the investment ecosystem to be involved with and went on to be head of the team and the accountable executive. So I had functional oversight of the appointment of investment managers, for example, within Fidelity. I was never the portfolio manager myself, I hasten to add, but I was the COO effectively of that business. And I spent, years and years in the board meetings of six investment companies. Board meeting after board meeting, I had the company secretaries reporting to me, responsibility for setting the agendas with the chair, et cetera. And so I had a really good and interesting sharp end experience of sitting in investment company boardrooms.

And as I mentioned earlier we took over management of Fidelity Emerging Markets. It used to be Genesis Emerging Markets. And so went through the process of A, pitching for that business, winning that business, overseeing the transition of the assets, and all sorts of interesting kind of legal considerations that come with that. Tupe for example, the staff that had been dedicated to looking after the assets at Genesis and their company secretary, we had to deal with those considerations and took on the management. And again, had a extraordinary experience. It was an emerging markets portfolio. We were relatively, overweight in Russia, and then Russia invaded Ukraine. So very quickly had to deal with the sort of implications of that. Both from an investment perspective, but also a lot of the kind of legal considerations of owning assets in Russia and what you did with them. So yeah, I had a pretty exciting experience there. And then laterally went to Pantheon and looked after the investment companies there.

So when I was making the transition from an executive to a non-executive role, I had plenty of sort of experience within the boardrooms of investment companies to back that up. But it is an interesting change, isn't it? Going from executive to non-executive and the things that you're actually responsible for change quite materially. Knowing what you're supposed to stick your fingers into and what you're not supposed to stick your fingers into was an interesting experience as well.

Ralph Grayson

So let's just stick with that governance theme at the macro level then before we dive into investment trust. Your role on the IOD commission anything particular you'd like to touch on in terms of what the commission found, what its purpose was when it was set up and any surprising conclusions or recommendations coming out of it?

Alexander Denny

So the IOD commission was established because it was 20 years since the Higgs review and the recommendations originally around the role of non-executive directors and a sense that the role of the NED had changed. We had quite a lot of conversations. It was chaired by Baroness Natalie Evans who did a great job of corralling us all, because frankly, I think it was like herding cats. There were lots of disparate views around the table and I was invited along, I think, primarily to give views from an investment company perspective where generally boards are entirely non-executive. Whereas if you think about, private company boards and the IOD is not just interested in listed companies, many of its members are private and executive directors.

The considerations of a private company board where you probably got two or three executive directors and potentially one is quite different to an investment company board, where typically you might have five non-executive directors. But there were a number of themes, I think, that were fair across the board. And we actually had quite a lot of conversation about whether the term non-executive director is right at all. Whether we should, for example, simply refer to independent directors, because, of course, the fiduciary responsibility of a director of a company, set by the Companies Act, is equally applicable whether you're non-executive or executive. And it's equally true if you're non-executive director of a charitable company that you may not be paid for, you are still on the hook if things go wrong and if the company becomes insolvent.

Now, the commission concluded that actually changing the name was probably an overreach and would confuse people because the term's been around for such a long time. But I think the non-executive bit was the bit that there was a lot of conversation about, because there is a very strong sense from the commission that NEDS should be involved in setting the strategic direction of the company. And that simply being a sort of tick-box exercise, in the listed sense, making sure that you're complying with the listing rules and the UK code of corporate governance, et cetera, isn't enough. Perhaps the compliance mindset has become too much comply. Rather than comply and explain, it's almost comply or die. It's the very rigid application of these guidelines and that sometimes it's right for companies to deviate from them and that might be to do with board independence, for example. What is an independent director? Do we have the right composition on boards? Is the ratio of execs to non-execs right? So lots of conversation around that.

There was a strong sense that boards should be less conservative in their approach to board hiring and of course, this is very relevant to you, Ralph. Not so much prescriptive about what it means to be less conservative. But if I put that in the context of an investment company. Going back 15 years, you would have the appointed manager of an investment trust board. You'd probably have one non-independent director who was a representative from the management company, and then probably either two or three directors, one of whom, or maybe two of whom had been portfolio managers and an auditor and that would be your board. Now, I think there's much more tendency to say, "Look, one of the challenges we face is engaging with our shareholder base. So we need to have someone who's a communications specialist of some sort, either from a marketing background or, someone who had been very good on the engagement, IR side of things." We do see more people who are digital marketing specialists or AI specialists, these things coming onto boards. And in many cases, that's the right thing to do. It's not always the case, but we shouldn't be saying a unitary board should consist of A, B, and C, and the A, B, and C is always the same thing. And also, potentially having younger directors, from different backgrounds isn't a bad thing.

The core finding of the commission, though, was about boards needing to be, and non-executive directors of boards needing to be, more curious and engaged and present in the business. There's a lot of talk about the roles and responsibilities and whether being a director takes up more time than it used to. And I think it, broadly speaking, does and can do for many reasons and activism that you touched on earlier is one of those reasons. But actually having time to spend within the business, if it's an investment company, spending time with the manager, with the analysts, with the rest of the team. Who is it who's leading the IR function? Who is it who's speaking to your investors? Making sure you built those relationships is really important because otherwise, how do you know if it's going well or perhaps more importantly in the dramatic end is how do you know if something is materially going wrong? Are people being upfront and highlighting those challenges to you early enough? And so the only way you will ever know that is to be there and present in the business. And so it's about spending that time with management to having the access and be approachable so that if someone has a concern, they feel that they can go to the board and speak to them about it.

Because otherwise, it becomes all about whistleblowing policies and how you go out to the outside world and, ideally, we want to avoid all of those problems from ever happening to begin with.

Ralph Grayson

So just pick on a couple of those themes that I find very interesting. One is that the focus we all now have on board training and development and something that conversation I have a lot down corridors, maybe rather than formally, is whether we should have some sort of certification for board members. Is that something the IOD looked as?

Alexander Denny

Yes, it is. Yeah. The finding of the commission was absolutely that there should be a real focus on continuing professional development for directors. Now, the IOD, and they said so at the time they have a certain amount of self-interest in this because, of course, you can become an IOD accredited director, you can become a chartered director. I have myself done a certificate in Nedship. I did one with Actuate, and it was an interesting course to do.

But the commission didn't find that everyone should go and become a certified director. What they did say was that it's really important that boards and non-execs can evidence for themselves and for the rest of the board that they are doing the right things to keep abreast of developments.

If I take my own personal experience, having spent so many years presenting to boards and in the boardrooms and hearing all of the conversations of six investment company boards, I don't think there is anything that I could have been taught by a NED course about being a director of an investment company that I hadn't experienced firsthand and learned by doing and seeing from some really excellent directors who have been directors of many companies before.

But in the moment I stopped working for Fidelity and then Pantheon, I didn't have that ongoing exposure. I don't see multiple boardrooms. If I'm sitting on one board, how do I know that I'm up to speed? So the commission absolutely found that people should be attending courses, going to seminars, webinars, and just keeping a record of those things. And it's interesting that the UK doesn't have strict requirements about that.

I used to be on mentioned earlier, Apax Global Alpha, that was a Guernsey company. I had to maintain a CPD log to be a Guernsey company director. But the UK doesn't have that and it seems to me a very strange omission. And in fact, I think anyone who is over 16 can be a UK company director. There's no requirements for any qualifications at all and that is quite extraordinary. You need to be able to demonstrate through experience or qualification that you're capable of doing the role.

Ralph Grayson

So let's just personalise that then. So what changed for you when you stepped into an investment trust boardroom?

Alexander Denny

One of the big changes when you become the director of an investment company is understanding the different levers you have to pull compared to my executive career. One of the things that's interesting about an investment company board, which is so different to many others, is the fact that it's entirely non-executive.

I say that not all investment companies are entirely non-executive, but I don't know what the percentage is, but more than 80% of investment companies are entirely non-executive and they appoint an investment manager and they might appoint a different AIFM company and company secretary. Sometimes that's all together and sometimes they're individual appointments. But the board is there to appoint people to manage the company on their behalf. They aren't directly hands-on managing it within their own organisation. That means that when things are going wrong, the way that you engage is different. You have choices. Do you go and engage with the existing manager and say, what is going wrong? And when I say going wrong, it might be an investment performance thing. It might be a shareholder engagement thing. It might be the website isn't working. Who is it that you need to go and speak to about those things? And one of the things that you can do is change the company that is providing those services. And that's what happened when Fidelity took over from Genesis on the Emerging Markets Trust. And it was one of the things that we discussed whether it would be possible to do for Apax Global Alpha.

But when you're within an organisation, you can remove the CEO, you can fire individuals from the company and bring in different people, but you don't change the entire kind of structure of the company and investment companies can do that. And you suddenly find yourself with a whole different set of considerations to that which you had in your executive career. So I suppose one of the changes in mindset was at Fidelity, I had to consider the risk that we would be fired from one of the companies that we were managing. I'm very pleased to say it didn't happen, while I was there, but that was the risk. But of course, as the non-executive director of an investment trust, that's the lever you have to pull. Because the portfolio manager decides whether he wants to buy a Marks and Spencer share or he wants to buy something else. The board doesn't do that. We decide who we're going to appoint as the manager.

Ralph Grayson

Let's just strip that back a little bit then. So you don't run the assets, but you're accountable for the outcomes. How does that shape what you do and how you do it as a board member?

Alexander Denny

Yeah, it's really interesting, isn't it? It's the stewardship of capital and it really brings you back to that fiduciary nature of the responsibility. So one of the things that I have always done and I think, many investment company directors do, but I have materially put my own money into the companies of which I'm a NED, because I want to have skin in the game.

I want to have that investor experience and I want to think about what the implications of, the decisions we're making are from a shareholder perspective. Which is much easier to do if you are a shareholder. But, if I look at the company of which I'm currently a non-executive director, the investment company, Aurora UK Alpha, we are in a period of relative under-performance. It's managed by a value manager, Gary Channan, Phoenix Asset Management, very strong reputation for the type of investing he does. And it's not unusual, if you look at the history of the company, to have quite prolonged periods of material underperformance against a benchmark. And then you will have, sudden runs where all of the things where the company had identified pockets of value are suddenly doing well, they recover, and we're miles ahead of the benchmark.

So you go back two years and the performance profile of the company looked completely different to where it does today. That is a natural consequence of the investment style. And it would be absolutely wrong to be changing the style of what a company is doing, changing the investment manager, changing the purpose of a vehicle every time you're suffering a period of relative under-performance, because an investment company is set up for long-term investment. And as long as you can hold yourself to that course and make sure that you're holding yourself to account.

The guiding principle is, this company still doing what it's set out to do? Do we still believe that there is a success from here and not to get too distracted by the kind of the short-term noise around these things? In many ways, I would say that it's a great opportunity at the moment in the Aurora UK Alpha because those assets have got more sort of upside value from where they are because those ideas haven't played out yet.

But the number of times I've seen boards make changes too quickly or abandon hope. But there's always the adage, isn't it, that if you're a value manager, what you want to do is be the last one to lose your job. And if you're still in your job and things turn around, then things are going very well. You have to think about things in that long-term way. But clearly, things can go wrong and it go wrong as in the manager is no longer doing what they said. The actual thesis of the investment process is no longer workable. The world has changed so fundamentally. And the great advantages the investment companies have is they can change. They can pivot and do completely different things and sometimes to very great effect.

Ralph Grayson

We all talk about the difference between management in the C-suite and influence in the boardroom. So how does influence work in an investment trust boardroom?

Alexander Denny

I think it's really important for an investment trust board, and particularly the chair, but the investment trust board as a whole to work out where the key relationships are and to build that real relationship of trust. So the chair, with the portfolio manager, the entire board with the portfolio manager, but the chair in particular. I'm aware that where I have joined boards, I've often been tasked with specific responsibilities. One of which is around the sort of shareholder engagement promotion for retail in particular. So I always try and make sure that I'm well-connected with the head of marketing, with the head of IR, if there is an outsourced PR agency, any external marketing agencies which may be used to have relationships with those so that we can discuss and share ideas and best practise.

And one of the things that happens quite often in investment companies, particularly with boutique managers, is they find themselves at a point where they promoted themselves very successfully within a particular sector. The manager had relationships with one or two key cornerstone investors, and the company's done very well. It's raised assets, it's trading at a premium and then it reaches a certain scale and, some of those early investors start thinking, "Okay, I want to recycle capital into other things." Starts trading at a discount, and they find themselves thinking, "What is it that we're not doing?" And it's very often speaking to retail investors, for example.

Lots of boutique managers don't know the boundaries of what retail marketing is and what the financial promotion rules are. Now, it's not for me or any other director who might be in a similar position to go in and tell that company what they must be doing, but we can very easily guide them towards, "Here's the principles." The AIC that I sit on the board of has published a lot of very useful guidance around retail marketing, for example. So I can point the head of compliance towards that. I can point the marketing team towards that. I can share in the past experience and wisdom, and bring in the management along for the ride as opposed to the CEO or the portfolio manager. In the case of Aurora, for example, our manager, Gary Chanin, is the CEO of the business and so he can go in and tell people what he wants to do. We can only ask and say, "As a board, this is what we would expect to happen." And we bring the management, along on that journey and hopefully, we all end up aligned.

Having said a bit about the ability of the board to change managers, that to me is a really kind of nuclear option. For the vast majority of cases, what you want to have is a really warm and supportive relationship between the board and the manager. And it is very much akin to the relationship between any other board and the Chief Exec. You want the chief exec to feel that they have the backing of the board, the support of the board, and that backing must be really resolute until such time as it genuinely isn't. In which case, there's a different conversation to have.

But, generally I think it's a constructive, positive sort of guiding hand and it shouldn't be about telling managers what they're not allowed to do. It should be about trying to find the encouraging ways of delivering better outcomes and therefore better growth and the development of the company in that way.

Ralph Grayson

is that what surprised you most having gone into a portfolio career and sitting on a board of investment trust, what you thought it was going to be like and what it is actually like and how you add value?

Alexander Denny

Yeah, I think one of the things I didn't realise when I was on the exec side, when I was at Fidelity and looking after the six boards was actually how much time is required of the directors and what they're doing behind the scenes and, the quiet influence that board directors do have.

I talked a bit about the relationship between the chair and the portfolio manager. But another very obvious one would be between the audit committee chair and the senior accountant or accounting partner or whoever is performing the CFO role on behalf of the company. There is just hours and hours of work that goes on between those audit chairs and the partners within the business. And one thing I would absolutely say and this was also a finding of the commission, is if you're sitting on a board and it isn't taking up for your time, if you're not doing the 25 or 40 days or however many days per year it says is expected of the board director, then you should be asking yourself, am I actually performing the function that I was here for? Am I adding any value? And if you're not adding value, then get off the board and make space for someone who is. Because ultimately, our duty is to shareholders, and if you're not delivering any value to shareholders, then you owe a cost to shareholders because you're getting paid for the role. That is the wrong thing to be doing. So I think I was surprised at how much of my time does get taken up by being a NED. But I enjoy it with that said.

Ralph Grayson

And so if somebody's listening to this and they're a prospective first time NED on a trust board, what's the checklist that they should go through when you've thought about your personal experience and you look around various board tables and think, "Gosh, he or she's good," as opposed to average. What are those motivations, what are those skills, experience, knowledge that we talk about that people should be thinking about?

Alexander Denny

The first thing I think you should always ask yourself before going for any board is, am I interested in the business of this company? The IOD found that this need for kind of energy and curiosity from board directors, and it's extremely difficult to be energetic and curious about something that you're not interested in.

And, so this is true for investment company boards. But, one of the classic ways of getting into a boardroom for the first time is getting experience on a charity board, doing something pro bono, that kind of thing. Do not join a board of an organisation that you're not interested in. You mentioned, I'm a trustee of the Nautical Archaeology Society and I'm a keen diver. I'm fascinated by history. I love the sea. I love maritime history. So it's very easy for me to feel impassioned about the work of that organisation, esoteric, though it may be.

Ask yourself, am I interested in the investment company? Ask yourself what value you think you can add? So what are the challenges faced by that business? It would be lovely if you were always being approached to join the board of an investment company that didn't face any challenges. But realistically, given the persistent discounts across the sector, I think the vast majority of investment companies do have at least some challenges. Are you able to help with that? Make sure you have done your own due diligence on the company. Investment companies, of course, are PLCs by their very nature that they are very public, and if something goes wrong, it can be a scandal, it can be a stain on your reputation.

Now, there are some companies which may be in dire straits where you think, "I can go in and help turn that company around." And that can be an absolutely fantastic thing to be able to say and evidence on your CV, but make sure you know which one you're going in for. Is it something that you can turn around? Is it because, getting that kind of thing wrong, I think, can be very costly to your career personally.

But I, for one, see that there are companies which are struggling which are really benefit from having great directors joining the board and being part of that turnaround journey. So I'm not saying don't get involved in a company that's distressed. But make sure if you are, that you know it rather than joining something that you think is fine and then discovering that it's all a horror show when you get your foot in the door.

Ralph Grayson

So let's bring this up to date then and let's just touch on the human hand grenade that's Boaz Weinstein and Saba and the Edinburgh Worldwide Trust. So let's just frame this around five-year performance which he's been very vocal about saying has been very poor performance, that the board has been out of touch, that the discount is something that is inadequate from a governance perspective.

I think there's always been a bit of a fallacy that trust boards are rather process-driven and a bit sleepy and why would I want to be on a trust board? And clearly all of this activists now is fundamentally changing the way people need to think about an investment trust board. So why don't, you just give me a bit of your perspective on this and both from the AIC perspective as well as your own individual perspective on this.

Alexander Denny

The AIC perspective, I'll start with because, of course, I am on the board of the AIC. The whole Saba episode, which of course isn't just Edinburg Worldwide, it's several trusts, some of which no longer exist anymore because they have either have started the process of winding themselves up or have merged into other vehicles, et cetera.

It was a few years ago, I've started hearing the name Saba and people saying, not quite sure what's going on here, because it didn't feel like other activists. And it was quite easy to dismiss them as like other activists. By which I mean those companies that would come along and be discount arbitrage players, buy things on a discount, and potentially trying to force the hand of the board to do something about it, have a 25% tender offer, have a 50% tender offer, offer like a recurring exit. All sorts of different options are on the table.

I think while many boards in the past have been frustrated by the engagement of activists, it's fair to say overall that the impact of activists on the sector has been probably positive in addressing a number of discounts. Actually, many of the sort of Erstweil activist shareholders have also been very long-term investors within the sector. So whether, kind of Elliot Partners or City of London or 607, these guys. They may not all categorise themselves as outright activists, but they were certainly discount arbitrage players and we knew how to deal with that as a sector. And generally, it was a constructive ongoing debate and then Saba started appearing.

And there was a sense that they weren't quite doing the same thing, because they were building quite large stakes. We knew that they were activists by information, but they weren't necessarily trying to force the hand of anything. They were just building these stakes. And also, they were building stakes in a way that was not immediately transparent. So they would effectively use stock lending strategies to gain exposure to these companies, but without having to declare their interest and weren't announcing when they went past 3% shareholdings. And I think there's a natural inclination to be suspicious of a company which is building a position in your shares, but doesn't want to tell you that they're doing it.

So there was this kind of nervousness around what's going on. And then it was just coming up to Christmas and there was this sudden bombshell where seven companies had meetings requisition to remove all the directors and put on new directors. And in the first instance, because this was new effectively, it was not the playbook that people had always seen. There was a moment of, hang on a moment, what should the industry response be? It was actually only a matter of kind of hours materially and 48 hours or whatever for people to really think, "Oh, hang on. We need to be doing something about this. " The response to kick in from the AIC's perspective, because it wouldn't be typical for a trade association to come out and make a comment on how shareholders should vote on any particular issue. But I do think the AIC became very aware that the playbook that that Saba and  Boaz Weinstein were playing to was not normal.

Without getting too much into the specifics, I talked earlier about board independence, for example. An investment company board is typically made up entirely of independent non-executive directors. And independence is independent from the manager. Now, what Saba appear to be trying to do is to take over the management of these companies. Or certainly, they have attempted on several occasions to take over the management of those companies. But they're doing so in a way that doesn't become subject to the takeover code. There's very little in terms of limitations on the disclosure they're able to do. And it certainly in the first instance, their proposal was to remove the boards of the investment companies and replace them with employees of Saba.

And we all looked at that and said, "Hang on, that's not independent." But the answer to that is it is independent because the employees of Saba are not employed by the incumbent manager of the investment company. So maybe at some point they would try and remove the investment manager and put Saba in as the investment manager. At which point you might have an independence question, but you don't actually hit that question until after we've already seized control of the company. And it was just extraordinary. And the AIC at the moment is working with the FCA, for example, consulting with the FCA and lobbying the FCA, on potential changes to make this kind of surreptitious kind of insidious takeover without breaking cover as a takeover more difficult without trying to hamper the ability of investors.

Ralph Grayson

The letter of the code rather than spirit of the code.

Alexander Denny

Yeah exactly and I fundamentally don't want to limit the ability of shareholders to raise grievances. I don't want to requisition meetings. I don't want to limit the ability of boards to choose to change manager. There's all sorts of things that have been discussed about, you could change your articles to make certain things more difficult.

But I think, in this instance, Saba brought they requisitioned a meeting, they lost the vote. A year later, they requisitioned manifestly the same requisition meeting for the same purpose and lost the vote. Then they come back a third time and there should be limits on the number of times that you can just try the same thing, losing the vote each time.

We've had responses like, "Well, you could challenge that as a vexatious requisition." But actually to raise that to win a successful claim that it's a vexatious requisition meeting is a very high bar. And of course it's litigious and costs a lot of money and just the sheer amount of money that has been spent on trying to fight off Saba is astonishing.

Ralph Grayson

It's an interesting philosophical question, really, isn't it? Is activism a sign of healthy governance in the sector or is there a breakdown in it?

Alexander Denny

It's a really interesting question. I think activism, as I said earlier, can play a very useful role. But I think, the governance response of the investment company industry to Saba has actually been very good. One of the things that's so frustrating about it is some of the claims about Edinburg Worldwide and its investment performance just don't even seem to stack up and be true.

I think it has outperformed over a number of the periods that has been criticised for not outperforming. It's done very well. Clearly, they are trying to take control of the company in that particular case and a couple of others, because SpaceX is in there as an unlisted holding with a very significant upside valuation. It's potentially going to list to the 1.75 trillion valuation. When they first started this exercise, it was valued on the books at considerably less than that. The actions of the board trying to protect shareholders. They offered a tender offer so everyone could get out of the liquid part of the portfolio basically to protect that value of SpaceX and the only people who voted it down were Saba. But because it had a higher threshold to pass that vote hasn't been successful yet.

It's not so much that there has been a breakdown of governance. It's that where you have high retail participation, for example, the shareholder vote turnout for these votes has been very high. But the bit that hasn't turned out remains that more or less uncontactable, disengaged bit of retail, and I don't think that it is something that will ever be overcome frustratingly. The industry's done a lot to engage with investors, but you can't force someone to vote.

Ralph Grayson

So for someone to listen to this, should they now just presume if they're thinking about joining Investment Trust Board, that there will be some source of activism in the future on their board?

Alexander Denny

I don't think you need to presume that there is going to be activism, but you should definitely not presume that there won't be activism. So the average sector discount for an investment company at the moment, I think, is about 14%. So some companies are trading very narrow discounts and some are significantly wider. Particularly still in the private assets space. But if a discount develops, I think you become vulnerable to arbitrage. What sort of flavour of arbitrage or activism that is an open question. And I think that the operating window that breadth of discount that the activists might be willing to act in has got narrower.

When Saba started this, so they were typically buying companies on about a 20% discount. But by the time they're starting to build their position, they'll quite happily continue building their position at a much, much narrower discount than that because by the time they've got you in their sights they've already built the position. So they're trying to close it out.

Ralph Grayson

Rise the question in my mind whether any and every NED needs to have a particular interest and understanding of both liquidity and valuation. We think it's SpaceX in this instance on the upside. We think of Woodford on the downside. Does that change the way all existing and prospective NEDs need to think about risk?

Alexander Denny

Any board which has got exposure to private assets in any form, I think you need to have sufficient valuation expertise to understand that. But you're right, actually, on the point of liquidity. I mean, one of the frustrating things about the UK market in general. Now, clearly, investment companies can invest in all sorts of different places. But, if you are investing in a UK small cap investment trust, as indeed, we've seen with some of the Saba targets the liquidity of the UK market is such that actually you can be a material price mover in some of those portfolio companies if you're trading at scale or if everyone knows that you're about to do it. And that is a problem.

There's all sorts of things I could opine on and what I think policymakers should do about improving the liquidity of the UK market overall. But the investment company sector is a microcosm of that. In fact, if you look at what's happening with discounts in the investment company space, which are generally narrowing now, and they have been right up until the Iran war. The volume of share trading required for that move is not very big and it's largely driven by retail flows. You'll hear in all sorts of circumstances, large institutional managers talk about small cap investing and say, I can't buy into something at scale because if I were to buy into a scale, I would move the price. So they don't buy it. Or they're doing very long period managed orders with price limits and they've got a broker out there working the book.

A retail investor comes along and they go to Hargreaves Lansdown or they go to an interactive investor AJ Bell, Fidelity, where I was, and they say, "I want to buy 10,000 pounds worth of these shares, and that is going to transact." And every time someone says, I want to buy 10,000 pounds worth of those shares, they move the price a bit. And it's the retail investor that moves the price, not the institutional investor at all.

Ralph Grayson

Just think about the optics of all of this and FCA guidelines changing to put more emphasis on showing how board members have used judgement. Are some boards now being judged not on actual performance, but on whether they've been willing to challenge the manager around that performance?

Alexander Denny

Yeah, they are and the other thing that I would say is what is good performance for an investment company board? Clearly, they are portfolios of assets where you have the NAV performance and that side of things. But the duty of a board is to deliver value for shareholders. And if something is trading at a 10% discount simplistically, if you could narrow that discount from 10% to zero, you've created 10% upside. Which is something that the portfolio manager on their own could not have done. I can't turn around and just magically narrow a discount. But the point is the board should be holding the manager to account and the marketers, the IR function, et cetera, for how well they promote the company, because the fiduciary duty of a company director is to promote the success of a company.

An investment company is completely unique in all of the UK corporate structures in that the only thing, the only product, that an investment company has to sell is a share in itself. And, if I were an investor and I'm going buy myself a UK retail business, I want to know what their go - to-market strategy is, what their product strategy is, what is it that they're selling to their customer? What shops are they using? What's their online presence? All of those are the responsibility of the board to make sure that we've got the right mechanisms in place. And it's not that, I don't expect the board director to be the person running the website, but they are appointing someone to run the website and they should be asking whether they're doing a good job.

Ralph Grayson

Is there a playbook for this then? If you're suggesting, if I'm hearing you that addressing those issues and addressing proactive marketing is the best way to resist an activist.

Alexander Denny

I'm not saying it's the best way. I'm saying it is a very important way. The presence of activists in general always comes about because there is an opportunity for them to start building a stake. Someone has to be selling them the shares. They have to be willing to buy them at that particular price. It can be, it's not always, but it can be an indication that there wasn't a good enough job being done previously in communicating with your existing investors. If you've got a period of under-performance, are you communicating with investors as to why that underperformance is there, what the valuation prospects are? You're going forwards, what do you think is going to happen?

Clearly there are other levers a board can pull. So a share buyback is something which generally you would expect the board to be signing off on the programme of share buyback. So they're not, daily saying, "Yes, do a buyback today. Don't do a buyback today." They appoint the broker or the manager to do that. But, is the buyback programme sufficient? That is another lever to pull. And if you buy back your own shares, then they haven't been sold to the activist investor. So understanding where those limits are.

But Saba has one very unfortunate consequence for the debate about this overall, which is about preventing activism. What is an activist just in the sort of ethereal sense? It's a shareholder who is going to try and engage with the board by one means or another to enact change that they think is going to improve the share price. Simplistically, a shareholder who wants to engage with the board to improve the share price is a good thing. But what Saba is doing is not. They're trying to seize control of the assets, which is ultra vires for the more generalist conversation about activism, but something we need to be very alive to.

Ralph Grayson

And I don't want to make this too much about Saba, but they have been very personal in their attacks and naming of various board members. Has that changed the relative risk of return for a non-executive board member on an investment trust?

Alexander Denny

I think it has, yeah. So these days, you might approach someone, a prospective board member, say, "Do you want to join the board of this company?" And they just turn around and say, " No. There's too much reputational risk associated with it. " And that's very sad. Clearly any board director joining any board, to the earlier points, needs to consider what they have to offer, the risks that they run from a fiduciary point of view. But some of the things in an investment company sense, Saba could not go in and just replace the board and take over management of a company that wasn't an investment company. They have entire teams of employees, for example. It's something very unique to the investment company structure with an appointed third-party manager, which has created this vulnerability.

So investment company boards have that now. I think the other thing is any prospective board member for an investment company should just expect that they might have to work a lot harder for all sorts of reasons. It might be that discounts have appeared and as it was the case for Apax, you have a strategic review and you end up winding up the company or you merge with another company or you just proactively choose to change manager. All of those things are going to take up a hell of a lot of time and that's not going to be your 20 days. The amount of money you get paid for the amount of work has, in some cases, you could end up working out your hourly rate and think, "God, I get paid less than one of those poor junior doctors that's always on strike."

It's not a terribly well-paid job if it's becoming a full-time job for a period of time because you're dealing with a particular issue.

Ralph Grayson

The role of independent or external board assessments is a theme that keeps coming up. Is this now in this context and showing the visibility of where you've added value and how you've done your job, is an external board assessment becoming more important now within the trust sector?

Alexander Denny

Yeah. External board assessments for the larger investment companies, of course, are required on a tri-annual basis. I've been involved with a number of investment companies that have decided to do them anyway. On my non - PLC board on Margaret's fund management we're undertaking a board assessment at the moment and next year we're going to do an external one. Private company, we don't need to do an external one, but we think it will be a valuable exercise. As with all of these things, to add value, you need to properly engage with it and make sure that you're appointing someone to do the evaluation who knows what they're doing.

Because I have seen some evaluations carried out that were just, they were tick box exercises, added very little value, and felt a bit like a chore. And then I've seen others where you think, wow, that's genuinely insightful. As with all of those things, it requires the board to be really bought into the idea of doing it. But yes, I think it is very important. Because it's too easy just to pat yourself on the back and say, "Aren't we doing a wonderful job because nothing has gone wrong?" there's a lot of confirmation bias in boards, I think.

Ralph Grayson

A longer conversation without doubt. So you've touched on time intensity and skillset expectations there, not least on the back of all this activism. The fundamental question for someone building a board career, is an investment trust NED role still attractive today?

Alexander Denny

I think an investment trust role is definitely still attractive today for the right sort of NED and for people with the right interests. The governance matters around them can be genuinely very interesting and quite esoteric in their own way. But you also get exposure to all sorts of interesting people. The portfolio managers of investment companies are, tend to be at least very kind of unique, engaging individuals with very kind of forthright views. And they're just fascinating people to deal with. I really like engaging with the analysts of investment companies and, of course the shareholder base and investor community who carry a lot of wisdom. So absolutely, I would encourage people to consider an investment company in their portfolio.

Ralph Grayson

And just looking to the future a little bit how should prospective NEDs think about the future of the investment trust model?

Alexander Denny

Over the years, I've heard a lot of people say that they thought the death knell was ringing for investment trusts in general. And in fact, they've turned out to be incredibly resilient vehicles. They've been around for over 150 years and I think actually the sector will come back from the current struggles it's had and you know the discounts and fast view is probably stronger than it was before. Might come back a bit smaller.

But I think the prospects for investment companies in general are good. I would say it's quite closely tied to some of the policies around the London Stock Exchange and the UK market in general. Cause although investment companies invest outside of the UK, of course, they're quite a significant part of the FTSE indices.

In fact, I think it's a bit of a sad indictment of the UK market actually just how many investment companies are in the FTSE 250. And it's not because I think that the investment companies that are there aren't great. They are. I just think that we should have more big, successful businesses that aren't investment companies because otherwise, what is the index? I mean, it's made up of a whole load of unlisted stuff or foreign assets that are masquerading in the FTSE 250.

Ralph Grayson

That's going to have to be our next episode. Fascinating. So look, quick closing reflection. If someone's considering a board role in an investment trust, what's the one thing they need to understand when they're going in? And what's the clearest sign that a board is genuinely doing its job well?

Alexander Denny

The most important thing for an investment company director to understand, to my mind, is that unique overlap of the shareholder as customer. Because there is no other business where your shareholder is your customer. And if you can really get that sense that delivering value for your customer is delivering value for your shareholder then you've nailed it.

Ralph Grayson

Alex, thank you. What comes through to me very clearly is that these roles are no longer passive. They require judgement, challenge, and a willingness to engage with difficult issues, particularly as the sector comes under ever greater scrutiny. So for anyone thinking about a board career, this is clearly an area where governance really matters and where the expectations of boards are evolving quickly. This has been a fascinating and a very practical, I hope, discussion.

So Alex, thanks for joining me on The Boardroom Path. If people want to follow you either in your guys within the AIC, or more generally where you've written some great though leadership around LinkedIn and other platforms how do people follow you? Where do they find you?

Alexander Denny

If they look up Alex Denny on LinkedIn feel free to send me a message. I'm very accessible. So happy to pick up any questions there.

Ralph Grayson

Fantastic. Alex, thank you so much.

Alexander Denny

Thank you. Thank you, Ralph.

Ralph Grayson

I hope that you've enjoyed listening to this podcast and have found it helpful when thinking about how to approach your own path to the boardroom. If you would like to push this a little bit further, Sainty Hird runs a bespoke one to one programme designed specifically to this end. For more information, please visit our website saintyhird.com, follow us on LinkedIn, and subscribe to the Boardroom Path to receive new episodes. Thank you for listening.