Keystone Positive Change 09 February 2021

Keystone Investment Trust (KPC) is to undergo a shareholder vote on 10/02/2021, with the board seeking approval for proposed changes to the management team and investment strategy.

As detailed under Portfolio, the board is seeking to appoint Kate Fox and Lee Qian of Baillie Gifford as named managers for the trust, and change the investment strategy. Going forward, the board is proposing that the trust targets capital growth from a global all-cap portfolio whilst adopting a comprehensive commitment to contributing towards a more sustainable world. This would represent a sharp shift from the existing strategy, which seeks to generate capital growth and income from investment primarily in UK equities.

The board consulted with major shareholders prior to finalising their proposals. As discussed under Discount, the subsequent period has seen little disclosed trading activity from notifiable shareholders, suggesting implicit support. The discount has since narrowed sharply, potentially an indicative sign of broader market interest in the new iteration of the trust.

This is possibly a result of the strong alignment of the proposed strategy with ESG considerations. Similarly, investors may have welcomed the change in manager given the very strong performance of the open-ended fund managed by the same managers, though past performance is not a guarantee of future returns.

Assuming, as we deem likely, the proposals are approved by shareholders, we understand that KIT is likely to employ structural gearing going forward. This is one of three differences proposed between KIT’s proposed strategy and that of the Baillie Gifford Positive Change fund, along with an allocation to unlisted companies and the ability to hold companies down to a market capitalisation of c. $500m, as discussed under Portfolio.

Evidently we are about to enter a transition period for Keystone. We believe it is probable that the board’s proposed change in strategy will be voted through by shareholders given the market reception to the news (as detailed under Discount). Existing shareholders will want to assess whether this change in strategy materially alters their rationale for holding the trust within their portfolio. For shareholders focussed on capital growth and agnostic on the underlying geographic exposure, we suspect the proposed wider opportunity set and investment universe will offer attractions. That said, it is a marked shift for existing shareholders, and being mindful of where we are in the stock market cycle, one that definitively changes both risks and potential rewards.

The shift in strategy is likely to bring the trust onto the radar of ESG conscious investors, with the process seeming to us likely to meet even the most stringent of ESG criteria. Along with the broader investment mandate we suspect it should furthermore broaden the shareholder base and attract an increasing retail following, with some evidence for this seen in the narrowing in the discount in recent weeks.