Model behaviour? It’s too close to call

This should not come as a surprise – history shows that recessions following financial crises tend to be both deep and durable.

As a result, many investors will want to be armed with as much knowledge as possible before adding an investment trust to their portfolio.

There are two main models for investment trusts – self-managed and managed. Both have their advantages, but the most obvious point is that there are rather more managed trusts than self-managed.

Still, many of the self-managed trusts are significant in size, including Alliance Trust, RIT Capital Partners and Caledonia, as Ben Willis, head of research at Whitechurch Securities, highlights.

He explains: “The difference between the two is that self-managed trusts do not employ a third-party fund manager, as the investment team employs its own team, with the chief executive usually sitting on the IT board.

“The main advantage that a self-managed trust has is that it is only beholden to one set of shareholders – whereas a managed trust has to appease both the shareholders of the trust and the shareholders of the asset management company which runs the trust.”

The impact of this is often felt most keenly in the associated costs. The costs of a self-managed trust tend to be fixed, while those of a managed trust are variable and often linked to net asset value (NAV) growth.

As an example, Mr Willis says: “If the NAV goes up by 10 per cent then the fee paid to the asset management company should, in theory, go up by 10 per cent. But there is a realistic chance that the cost of managing the portfolio is less than 10 per cent. Therefore, the remainder is profits for the asset management company.

“Within a self-managed trust, fixed salaries and bonuses are likely to be paid out to the investment trust team and so more of the ‘profits’ left over are for the benefit of the shareholders of the trust.”

He adds: “However, the opposite of this example also holds true in that if the NAV falls, then the costs paid to an asset management company also falls.”

Mr Willis admits there is an argument that as equities tend to rise over the long term, the shareholders within a self-managed trust will be better off.

There are, of course, benefits associated with the managed trust model. Charles Cade head of investment companies research at Numis Securities, remarks that those managers running several funds as opposed to one investment trust generally have greater access to resources. But he observes a recent exception to this rule, citing John Kennedy’s retirement from the Scottish Investment Trust.

“He organised the way they invest to allow for the fact that the resources were fairly limited by using a screening model which focused on bringing it down to a small number of stocks they could analyse,” Mr Cade explains. “It doesn’t mean [self-managed trusts] can’t perform well, but you have to go about it in a different way if you have fewer resources.”

He concludes: “Overall, what matters is having good management and sufficient resources. And to be self-managed you simply need enough assets and to have a remuneration structure that will keep people motivated and involved.”

Most new launches in the investment trust space take the structure of a managed vehicle, so the number of self-managed trusts is likely to remain fairly static.

Evan Bruce-Gardyne, director of investor relations at Alliance Trust, unsurprisingly favours the self-managed model.

He comments: “As a shareholder, I can see how much the board of my trust – the people who are managing the business strategically – are paid, which makes them much more accountable.”

He agrees that while this may not be enough of a reason to choose a self-managed investment trust over a managed model, there is greater transparency. “The self-managed trusts have more of a culture because they’re a living, breathing company, rather than something which has been created off the shelf,” he suggests.

For Mr Willis, there is “not a lot in it”, with the long-term performance of an investment trust more likely to affect its fortunes than the structure.

Ellie Duncan is deputy features editor at Investment Adviser

Expert view

Jonothan McColgan, Combined Financial Strategies

One of the main advantages of ITs is there is a board appointed to look after the interests of the shareholders, so they can ensure fund managers are justifying their fees, and act to replace them should consistently underperform. My concern on self-managed trusts is the accountability question. If the fund manager is on the board he is more able to influence the decisions of the other board members.