Have you ever felt like the financial world plays favorites? As a small investor, I’ve often wondered if the system is rigged to favor the big players—those with deeper pockets and louder voices. Recent events in the investment trust sector seem to confirm that suspicion, where deals involving large shareholders have left smaller investors questioning their place in the game. It’s not just about money; it’s about fairness, trust, and the principles that should guide the markets.
The Hidden Cost of Related-Party Deals
When you invest in a trust, you expect your interests to align with those of other shareholders, big or small. But what happens when the major players have their own agenda? Related-party transactions—deals where a major shareholder or their associates are on both sides—can tilt the scales. In 2025, the investment trust sector saw a handful of cases that raised eyebrows, not because they broke rules, but because they exposed how the system can disadvantage the little guy.
These transactions, while technically legal, often leave small investors with less value than they deserve. The issue boils down to net asset value (NAV), the benchmark that determines a trust’s worth. When trusts trade at a discount to NAV, it creates opportunities for savvy players to swoop in, but not always with fairness in mind. Let’s dive into three examples that highlight this problem and explore what it means for your investments.
Case 1: The Hedge Fund Transformation
Imagine investing in a trust that suddenly decides to pivot from its core strategy. One high-profile case involved a trust that served as a feeder fund for a well-known hedge fund. This year, it announced a reverse takeover to morph into a reinsurance vehicle—a completely different beast. Small shareholders were offered a partial tender at a discount to NAV, leaving those who didn’t want to join the new venture with limited options.
The deal passed, but only because the major shareholder and a special voting structure, known as a VoteCo, tipped the scales. This structure, meant to protect all shareholders, ended up serving the interests of the majority. According to analysts, this move “trapped shareholders in an incomparable vehicle,” raising questions about whether the process truly prioritized fairness.
Trapping shareholders in an unfamiliar strategy is far from best practice.
– Financial analyst
What’s particularly frustrating is the irony: the major shareholder behind this deal is known for advocating investor rights in other contexts. It’s a stark reminder that even those who champion fairness can exploit loopholes when it suits them. For small investors, this case underscores the importance of understanding voting rights and how they can sway outcomes.
Case 2: The Discounted Buyout
Another example involves a trust focused on renewable energy, trading at a steep discount to its NAV. Its top shareholder, a firm managing the trust, increased its stake significantly before making a bid for the remaining shares. The offer? A premium over the market price but still below the trust’s NAV. This move sparked debate: why would a manager, who earns fees based on NAV, argue the trust is worth less when buying it out?
The bidder’s enlarged stake also gave it enough clout to block competing offers, limiting the chances for a better deal. While the transaction followed all regulations, it left a sour taste for many investors. Roughly 15% of votes opposed the deal, signaling discontent among smaller shareholders who felt shortchanged.
In my view, this case highlights a conflict of interest. When a manager is both running the trust and bidding for its assets, it’s hard to believe they’re fully committed to maximizing value for everyone. It’s like a chef cooking a meal for you but saving the best ingredients for themselves.
Case 3: The Cash-Rich Merger
Then there’s the case of a trust with a hefty cash pile from a recent asset sale, sitting on a book value far exceeding its share price. After selling a major stake in a ports business, the trust held significant cash and a portfolio of underperforming funds. Management promised to “maximize shareholder value” but proposed a merger with another trust controlled by the same family.
The merger terms raised red flags. The trust’s shares plummeted 17% after the announcement, while the other trust’s shares soared. Critics argued that the deal favored the controlling family’s interests over those of minority shareholders. With over half the trust’s value in cash, why merge at a discount instead of returning capital to investors?
The market’s reaction shows who really benefits from this merger.
– Investment commentator
Perhaps the most galling part is the trust’s track record. Over the past decade, its portfolio barely grew, underperforming a global index by a wide margin. Had it simply invested in a low-cost tracker, shareholders might have seen far better returns. It’s a classic case of overconfidence in active management, leaving small investors to bear the cost.
Why These Deals Matter to You
These cases aren’t just isolated incidents; they point to a broader issue in the investment trust sector. When trusts trade at a discount to NAV, they become vulnerable to deals that may not serve all shareholders equally. Small investors, who often lack the influence to challenge these transactions, can find themselves sidelined.
- Limited voting power: Major shareholders or special voting structures can dominate decisions.
- Conflicts of interest: Managers or related parties may prioritize their own gains.
- Discounted deals: Offers below NAV can erode value for minority investors.
What’s worse, these deals often pass because they comply with regulations, even if they feel unfair. It’s a wake-up call for anyone with money in investment trusts: you need to stay vigilant about who’s calling the shots.
Protecting Yourself as a Small Investor
So, how do you navigate this minefield? It’s not about avoiding investment trusts altogether—many offer great opportunities—but about being proactive. Here are some steps to safeguard your portfolio:
- Research voting structures: Understand who holds the voting power and how it might affect decisions.
- Monitor NAV discounts: A large discount can signal vulnerability to opportunistic deals.
- Stay informed: Follow announcements about mergers, buyouts, or strategic shifts.
- Diversify: Don’t put all your eggs in one trust to reduce the impact of a bad deal.
Personally, I’ve learned to dig deeper into the fine print of any trust I’m considering. It’s tedious, but knowing the governance structure can save you from unexpected surprises. A little homework goes a long way.
The Bigger Picture: Governance and Fairness
These deals raise a bigger question: is the investment trust sector doing enough to protect small shareholders? Corporate governance isn’t just a buzzword; it’s the backbone of a fair market. When major players can bend the rules to their advantage, it erodes trust in the system.
Regulators have started to take notice. Recent rule changes have made it easier for some deals to proceed, but they’ve also sparked debate about whether more oversight is needed. For now, small investors must rely on their own diligence and the hope that boards prioritize fairness over expediency.
| Issue | Impact on Small Investors | Possible Solution |
| Related-party deals | Reduced shareholder value | Stricter voting restrictions |
| NAV discounts | Vulnerability to lowball offers | Better transparency |
| Voting power imbalance | Limited influence | Enhanced shareholder protections |
The table above simplifies the challenges and potential fixes, but the reality is messier. Change won’t happen overnight, but raising awareness is a start. As investors, we have a voice—let’s use it.
What’s Next for Investment Trusts?
The investment trust sector isn’t going anywhere, but it’s at a crossroads. With many trusts trading at discounts, the temptation for related-party deals will persist. For small investors, this means staying sharp and selective. Not every trust is a trap, but knowing the risks can help you avoid the ones that are.
In my experience, the best defense is a good offense. By diversifying your portfolio, researching governance, and keeping an eye on market signals, you can tilt the odds in your favor. It’s not about outsmarting the big players—it’s about making sure they don’t outsmart you.
Fairness in investing isn’t guaranteed; it’s something you have to demand.
– Financial commentator
As we move forward, I’m cautiously optimistic. The market has a way of correcting itself, but only if investors like us stay engaged. So, next time you’re eyeing an investment trust, ask yourself: who’s really calling the shots? The answer might just save your portfolio.
