How significant is a trust’s structure?

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].

“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.”

Mr Bell continues: “The internally managed model has many of the same issues but the joint identification between the board and the internal self-managing team tends to be greater. This is not a problem if the board and the staff are properly self-critical and address problems.”

But he concedes both models rely on the independence and proactive nature of boards.

When it comes to transparency, James Budden, director at Baillie Gifford, considers it’s a “level playing field” between the two structures, but he accepts there are different cost pressures on both models.

“Managed trusts benefit from economies of scale by being clients of a big group. They will also be able to access a bigger and better resourced sales and marketing machine and potentially access to deeper investment resources. In practice, self-managed trusts are generally good at managing their costs so the disparity is more about value for shareholders than absolute price,” he says.

Ellie Duncan is deputy features editor at Investment Adviser

EXPERT VIEWS

Jonothan McColgan, director and chartered financial planner, Combined Financial Strategies

“As with all investments there is not much difference when things are going well but what are the threats when they are not? One of the main advantages of investment trusts is that there is a board appointed to look after the interests of shareholders. So they can ensure fund managers are justifying their fees and act to replace them should they invest off of mandate or consistently underperform.

This is really important when you consider that the value you can sell trusts for is not the price they are worth [net asset value] but the price someone else is willing to pay [share price]. So if the fund manager consistently underperforms, there is a chance the share price on offer could be substantially lower than the real value of the assets in the investment, in effect magnifying the underperformance.

At least if there is proper external governance, then you would hope the board would use its expert oversight to ensure the fund management team remains appropriate or if not suitably replaces them.”

Gavin Haynes, managing director, Whitechurch Securities

“On the face of it I prefer the concept of a managed investment trust, whereby the board is independent and the manager is held accountable for the performance and can be changed if it doesn’t achieve its objectives.

This structure is much more prevalent across the sector and provides a level of transparency that many investors prefer. With a self-managed trust, if the manager is on the board of the trust, then there is clearly a vested interest in he or she remaining in charge.

However, there are a number of examples of self-managed trusts that have proven successful and where the managers have significant monies invested in their trusts, aligning their interests with the wider shareholder base. From a cost perspective, self-managed trusts can have the advantage of a fixed fee, which may prove attractive to shareholders.

While a consideration, the difference in structure between managed and self-managed does not have a major impact in my selection criteria and I will look at each individual trust on its own merits.”

Dennis Hall, chartered financial planner, Yellowtail Financial Planning

“If charges are the most important factor, you might sensibly choose a self-managed option, but if you also value board impartiality you’ll find yourself making compromises. The issue is that many of the features between managed and self-managed investment trusts are diametrically opposed.

In spite of there being relatively few self-managed trusts, many of them are significant in size and have achieved that through performance their shareholders have deemed acceptable and at a cost that is largely fixed. But the fixed cost of an in-house team masks another problem of self-managed trusts: the lack of resources compared to an external management company, and it’s even more pronounced in smaller self-managed trusts.

Yet for some there is something attractive about only being beholden to one set of shareholders. When you’ve appointed an external management company, there’s another group of mouths to feed and another set of shareholders to please. And there’s only one group picking up the tab, and that’s the underlying investor – but perhaps it’s a price worth paying to receive investment management that remains independent of the board.”

SELF-MANAGED INVESTMENT TRUSTS

Caledonia Investments

Manager: Will Wyatt

Total assets: £1.6bn

Launch date: July 1960

Discount/premium: -16%

Five-year performance: 147.9 per cent

RIT Capital Partners

Manager: Ron Tabbouche

Total assets: £2.8bn

Launch date: June 1988

Discount/premium: 1.5%

Five-year performance: 149 per cent

Witan Investment Trust

Managers: Andrew Bell and James Hart

Total assets: £1.8bn

Launch date: February 1909

Discount/premium: 0.1%

Five-year performance: 183.9 per cent

MANAGED INVESTMENT TRUSTS

Scottish Mortgage

Managers: James Anderson and Tom Slater

Total assets: £4.1bn

Launch date: January 1909

Discount/premium: 1.4%

Five-year performance: 223.6 per cent

Foreign & Colonial Investment Trust

Manager: Paul Niven

Total Assets: £3bn

Launch date: January 1868

Discount/premium: -8.4%

Five-year performance: 169.9 per cent

Monks

Managers: Charles Plowden, Spencer Adair and Malcolm MacColl

Total assets: £1.1bn

Launch date: February 1929

Discount/premium: -12.1%

Five-year performance: 129.1 per cent

Source: AIC using Morningstar, all data to December 1 2015