How significant is a trust’s structure?

This article is part of
Winter Investment Monitor - December 2015

Investment trusts are structured in one of two ways: they are either managed or self-managed.

In the past, the majority of closed-ended vehicles were self-managed but now this structure accounts for just 34 out of 316 trusts, according to data from the Association of Investment Companies (AIC).

Annabel Brodie-Smith, communications director at the AIC, explains of managed trusts: “The board of directors selects the fund management group and has a contract with [it].

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“Companies that have no management group involvement are called ‘self-managed’. This means the board of directors selects and employs a salaried fund manager (or managers) directly or the board manages the company itself.”

So the structures are fairly self-explanatory but what are the implications for investors? Should the structure of a trust determine whether or not they invest?

James de Sausmarez, head of Henderson Global Investors’ investment trust team, observes: “In today’s world, investment trusts have found certain advantages in being managed by specific management companies in terms of the depth, the resource and the expertise that’s available to them, and the ability of those management companies to provide the full range of services – not just the actual portfolio management but also the administration, sales and marketing services [too].”

He adds: “[But] I don’t think that… whether it’s self-managed or run by a management group is a key factor in anyone’s investment decision. I think the performance of the underlying portfolio and how well the shares are performing and what the level of dividend is, are likely to be much more the factors that will influence the buying decision.”

If a self-managed trust goes through a period of underperformance though, the nature of the structure means there are some obstacles in turning performance around.

Mr de Sausmarez acknowledges self-managed trusts face more of a challenge in tackling dips in performance: “If they decided that their management team wasn’t delivering then they’d have to replace their management team, which is difficult. Whereas a big management group may well have additional resources or alternative resources already within it.”

Alliance Trust, which has been run as a self-managed trust, responded to criticism about its recent underperformance with significant structural changes. In a statement in October, the trust announced it was simplifying its structure by appointing an independent board and outsourcing management to Alliance Trust Investments. These changes, which will effectively make it into a managed model, are ongoing, so it will be some time before its effects can be assessed.

Witan Investment Trust has worked around its self-managed structure by using a multi-manager approach, which it adopted in 2004.

Chief executive Andrew Bell remarks both structures are “perfectly valid ways” of managing a portfolio, but he is cognisant of the limitations of the managed model.

He suggests: “The managed structure with a single external manager is in principle easier to change, in that a beauty parade can be conducted if the existing manager is felt to fall short or better options exist. In practice, changes are rare, not simply because most managers do a reasonable job. Inertia, fear of disruption, the costs entailed in changing manager… and the fact managers often also provide other services, such as compliance support and company secretarial services, all militate against changes occurring in some cases when it should.”