Last month Fundsmith resigned as the investment manager of its namesake emerging equities trust, leading to the board recommending to shareholders that they should vote for its liquidation.
The company’s pre-empting move was an unusual one, as an investment trust board itself will normally decide when to get rid of the trust's manager.
At the time, Fundsmith’s chief executive Terry Smith issued a barb against other fund managers in the statement announcing the proposed closure: “Unlike other fund managers who might seek to hold onto the fund for the sake of the fee income, we feel it would be in the best interests of shareholders to receive their investment back in cash.”
He raises an important question. Who should decide when a trust should close?
The pressure on trust managers to explain their fees and justify its performance has been growing in recent years, and the rise of passive investing has increased this.
There has also been criticism of investment trusts over the years for the existence of too many small, sub-standard trusts.
Trusts are governed primarily by boards, normally made up of four to six experienced members of the financial services industry, who will appoint or dismiss portfolio managers, and be accountable to shareholders for the trust’s performance.
A former trust board member told me recently he was surprised at how much his fellow directors cared about their position.
But, he said, the remuneration for these roles is nowhere near high enough for the level of risk the directors are taking on.
Investment trust board members make anywhere between £20,000 and £40,000, and although it is not a full-time job, it is much less than could be earned in other financial services roles that these people would be qualified to do.
With the Financial Conduct Authority’s consumer duty quickly coming down the track, the pressure on board members to ensure investors are getting a good deal will increase further.
The issue is what should be done when the trust underperforms, as the costs of closures are huge and can run into the hundreds of thousands.
Taking a decision to close an investment trust could therefore potentially be more expensive than allowing the trust to continue to underperform.
Trust closures can also get messy. Take Gresham House Strategic, now called Rockwood Realisation. The trust’s shareholders initially voted by 93 per cent to wind the investment company, and then a year later, 96 per cent voted for it to begin actively investing again.
Investors’ funds were caught in the battle, as the trust returned £25mn to shareholders before the board proposed that funds should be invested again.
Another option is to merge the trust with another, which is increasingly popular – it happened five times last year, compared to two in 2019 and 2018. Though there are costs associated with this, in the long-term, mergers reduce fees for consumers and create more liquid investment companies.