Further questions raised around governance of Gresham House Strategic investment trust

An ongoing dispute has led the former chair of Gresham House Strategic to write to shareholders about a 'breakdown of trust'

The management and winding up of Gresham House Strategic (GHS) investment trust has been criticised by its former chair who has raised further corporate governance concerns.

The trust has been in an ongoing period of dispute, as covered by ESG Clarity’s sister title Portfolio Adviser, and most recently it was announced in November that the trust would be wound up as the board and its recently departed manager Gresham House Asset Management (GHAM) failed to agree on its future.

Gresham House plc (GH), which is the parent company of GHAM, called an EGM earlier this year due to “governance concerns” over the board composition, which was mainly due to the lengthy tenure of David Potter, the chair who had been in place since 2015. Potter has called this a “smokescreen” and, around the same time, the board said it would undertake a strategic review to address the widening discount. The five-month review concluded in early October with GHAM being replaced by Harwood Capital.

However, GHAM gained the support of almost half the trust’s shareholders (holding around 23.4% of the shares itself) calling for the board to liquidate the portfolio in early November after it was claimed GHS had “failed to deliver an agreed solution for all its shareholders”, a new chair for the board or address governance issues that it had previously raised. 46.8% of investors voted in favour of the wind-up, with backings from institutional investors but it is understood a number of smaller shareholders wanted the trust to carry on with Harwood at the helm.

This morning, former chair of GHS Potter, who resigned in June but still owns 21,287 shares in the trust, wrote an open letter to shareholders highlighting corporate governance concerns around the management of the trust and conflicts of interest.

It said GH had a conflict of interest between its role as manager and as a shareholder. He also noted its CEO Tony Dalwood had a “significant personal financial interest in the performance fees that…the shareholders, were paying (£366k out of £1.9m in 2019, an unknown percentage of the £2.3m first fee payment in 2021 and presumably another share of the miscalculated second fee GH recently invoiced of c.£2.6m)”.

Last month, Portfolio Adviser reported the trust’s NAV had been overstated by £1.3m from July meaning the board overpaid GH in management and performance fees.

Potter continued in his shareholder letter that Dalwood “refused to engage with an investor” to discuss proposals around enlarging the investment company and reducing fees even though the board felt discussions were worth exploring.

Potter also criticised the appointment of individuals to the board: “GH voted in favour of the re-appointment of all the directors and the adoption of the report and accounts at every AGM since the company was started in 2015. Raising the spectre of ESG tenure issues when seeking my recent resignation, was a smokescreen for disliking the board’s independence in considering these proposals which did not suit GH’s commercial interests.”

He also noted the manager Richard Staveley’s resignation leaving the portfolio “rudderless” and said that the recent spats had caused a fall in share price and increased the discount to NAV.

“For reasons that have not been made clear certain (unspecified) institutions gave GH irrevocable undertakings to support their wind-up proposal,” Potter continued. “I believe that GH’s motives in proposing the wind up were driven by pique at losing the valuable management contract and a need for cash to support their business ambitions, neither of which affect the remaining 77% of the GHS shareholders. You will note that Harwood, the new manager, did offer to buy GH’s stake (so that it was not an overhang on the market) and give the vote of most of their shares they offered to invest in, to the board to mitigate the conflict of interest issues highlighted.”

He called for answers to the following questions:

  • “Why wind up a highly successful fund, especially in such a complex and expensive manner?
  • “Why should shareholders be faced with a large capital gains tax charge without any opportunity to tax plan?
  • “Why lose the benefit of tax losses carried forward, which belong to shareholders, on the completion of a two year wind-up?
  • “Why shouldn’t shareholders be offered a follow-on option or alternative fund so they can if desired stay with the same manager and the same successful strategy?
  • “Why did some institutional investors (all of whom had expressed satisfaction with performance and the board’s stewardship in the last three years) support a wind up?”

He reiterated there has been a “breakdown of trust” between GH and the board, which is evidenced by three chairs resigning in the last six months and added there is a “real risk to shareholder value from announcing a forced sale” when the portfolio holds relatively illiquid shares.

An alternative would be to offer shareholders a “roll-over fund” where they are “not forced to lose their investment for an uncertain return over an uncertain period”.

He also invited private and institutional investors to contact him on david@davidpotter.org.

ESG Clarity contacted Gresham House who provided this statement: “Gresham House believes that corporate governance principles were not properly observed by GHS in the conclusions of its strategic review. The inadequacy of the consultation process is clear in light of the fact that it is not supported by five of GHS’ top seven institutional shareholders, comprising 47% of GHS shareholders.

“These shareholders have asked for a wind down and want their money back. They have called for liquidity for all, as opposed to simply Gresham House as proposed by the strategic review, and they have expressed concern about corporate governance at GHS. They believe a vote is a democratic way for shareholders to make a decision on the future of GHS in the absence of strong governance from the board.

“Gresham House has always been focused on creating shareholder value and remains committed to this principle. GHS has delivered standout performance versus peers since Gresham House was appointed investment manager in 2015, delivering a share price total return of 79.9% over three years and 126.8% over five years (the UK Smaller Companies AIC sector, delivered 32.3% and 96.8% respectively). This has generated outperformance of 47% and 30% for shareholders.”

On the performance fee issue, it added: “Gresham House invested in Gresham House Strategic in line with the principle that it should be fully aligned to the performance of the company and to demonstrate its commitment to its success. GHS can require GHAM fund managers to reinvest up to 50% of the fee into GHS shares. Potter has repeatedly praised Gresham House for this position in his chair statements in annual reports and we are surprised and disappointed that he has only chosen to change his mind now.”

ESG Clarity and other Bonhill titles are running a Campaign for Better Governance across the investment industry. For more details, click here.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...