InvestmentsNov 11 2020

Investment trusts could be hit by rise of ESG

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Investment trusts could be hit by rise of ESG

The increasing focus of investors on environmental, social and governance (ESG) issues could be a negative for investment trusts, according to James Sullivan, who runs the newly launched model portfolio service at Tyndall.

Mr Sullivan said investment trust providers face two existential challenges in the years ahead, the first from consolidation in the wealth and advice markets, and second from the separate rise in investor interest in ESG.

The issue with consolidation is that it ultimately leaves a smaller number of fund buyers, each managing a larger amount of money. 

Because investment trusts are listed on a stock exchange, most of the time they are buying already existing shares.

If a major fund buyer does this, it is likely that the share price of the trust would rise sharply due to the volume of new cash chasing the shares, and change the investment case. 

Mr Sullivan, whose previous roles include working on a fund of investment trusts at Iimia investment group, said: “The issue is that I can think an investment trust is a good investment for clients at £1 a share, but by buying it, I could push the share price to £1.10 a share, and not think its an attractive investment any more, and the reality is that only a small number of trusts are large enough to withstand that.

"Whereas with a unit trust or an ETF, they just create new units to meet inflows, and cancel units when there are outflows, so there aren’t the same issues.”

He added: “And that comes onto the point about ESG and investment trusts, specifically governance, the G in ESG.

"The smaller investment trusts in terms of size also tend to be those that are the poorest performing. And I think that, just as investors look at how trading companies are governed, they should look at how investment trusts are governed.

"Are the trust boards doing their jobs? Are the right questions being asked around whether a small trust is a going concern, in the same way a small company that is underperforming would. Those are questions that should be asked of investment trust boards.”

Investment trusts have boards of directors whose role is to represent the shareholders in the trust, and which has the power to remove the fund manager or close down a trust.

At a number of investment products, including the one Mr Sullivan used to work on at Iimia, the managers took stakes in underperforming trusts in anticipation of boards taking action to remedy the situation, but until this year, such action from boards has been relatively rare.  

But in 2020 the board of a trust run by Richard Buxton closed the trust, while the board of the Perpetual Income and Growth investment trust decided to merge their underperforming fund into the Murray Income trust.

That move involved some directors of the former standing down from the board.

The board of the Edinburgh investment trust replaced Invesco as manager this year.

Mr Sullivan said: “The question you have to ask about the boards is about the hands that feed them ie, where the priorities lie.”  

He added: “The rise of ESG is generally not good news for investment trusts.” 

Nick Britton, head of intermediary communications at the Association of Investment Companies, a trade body representing investment trusts, said: “We have seen boards becoming increasingly proactive in recent years.

"For example, in 2020 alone, 39 boards have negotiated lower fees for shareholders – around a tenth of the entire investment company universe.

"We have also seen boards replacing the managers of investment companies, leading a merger between two investment companies, and in a number of cases, deciding to recommend a wind-up of their investment companies and return capital to shareholders.”

Minesh Patel, an adviser at EA Financial Solutions in London, uses an MPS service which has investment trusts within it, and also holds investment trusts within the portfolios he manages for clients.

He said: “Investment trusts are more complicated than unit trusts so it is a more complex conversation with the client. But I think more people are interested in them now, as the performance has been strong in recent months, and the trusts we own are invested in technological change which is a long-term trend.”    

Mr Sullivan has joined Tyndall to launch the firm’s managed portfolio service.

Tyndall was founded in 2014 by Alex Odd, a former fund manager at M&G.

Mr Sullivan said a spate of providers have brought MPS services to market in recent years. 

He said: “A lot of providers have come to market with very cheap products, but I don’t think that is what we will be doing, we don’t think there will be many winners from that, and there will be a lot of losers.

"I see myself as both a fund manager and a service provider. I won’t be talking to the end client, or doing the suitability, that’s not my job. But at the same time I don’t want a thousand and one clients, we want to partner with good quality advice firms, and to tailor what we offer, we have portfolios of course, but we will work with the advisers to tailor what we have for their clients.”  

david.thorpe@ft.com