Investment trusts could be hit by rise of ESG

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.