Saturday, 21 February 2015

Getting personal

The best vote of confidence in an investment is putting one's own money on the line. So many analysts and investors feel that it is important that the manager of a fund has some of his or her own money in the fund they run. Investment trusts, unlike open-ended funds, are listed companies so they have a board of directors, and investors expect boards and managers to have a personal investment in the companies which they direct and manage.
"It sends a clear and powerful message to both existing and potential investors," says Alan Brierley, director, investment companies team, atCanaccord Genuity. "We believe the closed-end industry consists of many exceptional long-term savings vehicles and we are encouraged to see many directors and managers with material investments. That said, there is a marked polarisation, and the apparent lack of conviction by some does not sit easily with the degree of commitment expected by investors. To say, 'I'm on so many boards, I couldn't possibly have an investment in all of them' is not an acceptable defence in our view."
Mr Brierley has compiled a report looking at what level of interest managers and directors have in 260 investment trusts. Out of these 55 chairmen or directors have a personal investment worth more than £1m in the trust they are involved with as at 4 December 2014, and 48 managers or management teams have in excess of £1m.

Top 20 directors with a personal investment in excess of £1m
Investment trustDirectorValue of director's personal investment (£m)
RIT Capital PartnersLord Rothschild OM GBE/Hannah Rothschild155.441
North Atlantic SmallersChristopher Mills65.290
Better CapitalJon Moulton45.798
Riverstone EnergyPierre Lapeyre Jr/David Leuschen43.650
3iSimon Borrows39.816
Independent Investment TrustDouglas McDougall24,811
Caledonia InvestmentsWill Wyatt24.131
Hansa TrustWilliam Salomon21.433
BACITTom Henderson19.840
Jupiter European OpportunitiesAlex Darwall19,569
Independent Investment TrustMax Ward15.132
Value & IncomeMatthew Oakeshott14.169
WitanHarry Henderson8.687
Caledonia InvestmentsJamie Cayzer-Colvin8.363
North Atlantic SmallersPeregrine Moncreiffe7.155
Conygar Investment CompanyRobert Ware6.376
London & St LawrencePhilip Ashfield6.179
MonksDouglas McDougall5.359
Strategic Equity CapitalClive Thompson5.139
Personal AssetsFrank Rushbrook4.302
Source: Morningstar & Canaccord Genuity Research, as at 4 December 2014

Top 20 managers/teams with a personal investment in excess of £1m
Trust Manager Value (£m)
RIT Capital PartnersLord Rothschild OM GBE/Hannah Rothschild155.441
North Atlantic SmallersChristopher Mills65.290
Third Point OffshoreDaniel Loeb63.620
JZ Capital PartnersJohn Jordan/David Zalaznick56.388
Better CapitalJon Moulton45.798
Riverstone EnergyPierre Lapeyre Jr/David Leuschen43.650
3iSimon Borrows39.816
Electra Private EquityManagement Team34.522
Caledonia InvestmentsManagement Team32.587
Aberforth Smaller CompaniesManagement Team28.457
Scottish MortgageJames Anderson25.423
Macau Property OpportunitiesManagement Team25.358
Ecofin Water and Power OppsEmployees and Related Parties25.028
HansaWilliam Salomon21.433
BACITManagement team20.638
Jupiter European OpportunitiesAlex Darwall19.569
Artemis Alpha TrustJohn Dodd/Mark Tyndall/Adrian Paterson18.186
Value & IncomeMatthew Oakeshott/Angela Lascelles16.327
Independent Investment TrustMax Ward15.132
Aberforth Geared IncomeManagement Team11.671
Source: Source: Morningstar & Canaccord Genuity Research, as at 4 December 2014

And while other investors don't feel that it is essential for managers or boards to have holdings in the trusts they run, they do like to see this.
"It is great if a manager has a holding in the fund he or she runs, and my savings are in the trust I run," says Peter Hewitt, manager of F&C Managed Portfolio Growth (FMPG), a fund of investment trusts and IC Top 100 Fund. "This also the case for directors. However, if a manager doesn't have a big stake in the fund they run that is not a reason not to invest. That shouldn't be the factor that determines whether you own or don't own an investment trust." As stated in FMPG's 2014 annual report, the four directors of FMPG own 32,500 shares between them, worth £45,987 as at 20 January 2014 when the trust's market cap was £36.6m.
Managers and directors having a large shareholding does not necessarily guarantee good performance. The trusts in which directors and managers have the largest stakes are mixed in terms of their performance - some have done well and others have not done so well.
David Coombs, head of multi-asset investments at Rathbones, says making non-executive directors take large stakes in a trust shows commitment but does not necessarily make a difference. However, he feels it is important for fund managers to have money invested in the trusts they run.
The exception to this would be where a manager runs three or four funds, but does not invest in them all. "If he or she has money in one fund it need not be the investment trust," says Mr Coombs.
There are other reasons a manager or director may not have a holding. If they are newly appointed they will not suddenly be a large shareholder.
If a fund manager is younger he or she will probably be less wealthy, while if the fund is invested in high-risk assets, you cannot expect them to put in a very large proportion of their wealth. And regardless of age some fund managers and board members are wealthier than others.
Robin Keyte, a chartered financial planner and director of Keyte Chartered Financial Planners, says that while it is nice to know a manager and directors have their money in a trust it is not a make or break decision when considering whether to put a client's money in, if there are other compelling reasons to invest.
Dr Keyte's main considerations are:
• discount - because he prefers this to buying at a premium;
• yield - as lots of his clients like this;
• ongoing charge; and
• not having too much gearing (debt).
He also considers performance to some degree, although he argues that you cannot base advice on past performance.
Mr Brierley also says that board and manager holding in a trust is one of a number of factors to consider and not the most important one, and that investors should not totally avoid investing in a trust just because of this.

Too much?
If any one shareholder or group with a collective interest holds a large number of the shares in a trust, this could reduce liquidity because fewer shares are traded freely and it gives them a lot of control over the trust relative to other shareholders.
For example, if a management group holds 30 to 40 per cent of the shares it could block proposals such as a capital restructuring. It may not be in the interest of the fund management house to control the discount by buying in shares as by shrinking the size of the investment trust they would lose fees. In addition, if shareholders want to sack the fund management house or manager running the fund, this could also be blocked if the fund management house has a substantial interest.
"An asset management group may be more inclined to short termism, and I wouldn't want the management group to have more than around 20 per cent as it could influence the board," says Charles Cade, head of investment companies research at Numis Securities. "Having both board and management stakes is good in that it aligns their interest with shareholders but it is better that it is not too much."
But in some cases this is not considered a problem. Members of the Rothschild family who are directors collectively own more than 28 per cent of the shares of IC Top 100 Fund RIT Capital Partners, according to Morningstar data. However, Mr Hewitt says that as this is such a massive trust with a market capitalisation of £2.18bn this is less significant. There are still many shares in circulation and Mr Hewitt adds that it means trusts like this are less subject to corporate activity.
Similarly, the Cayzer family own nearly half of the shares in Caledonia Investments (CLDN) but this has a market capitalisation of £1.26bn.
Both these trusts were originally family wealth vehicles which were eventually floated on the stock market allowing other investors to get in, while the families retain a large stake. "These are essentially family vehicles and have long-term interest at heart," says Mr Cade.

IC Top 100 Funds
We count many investment trusts among our IC Top 100 Funds, so how do some of these do in terms of board and manager interest?
The managers or teams with more than £1m invested according to the Canacord Genuity research include the following IC Top 100 Funds:

RIT Capital Partners (RCP)Personal Assets (PNL)
Scottish Mortgage (SMT)Finsbury Growth & Income (FGT)
BACIT (BACT)Graphite Enterprise Trust (GPE)
Jupiter European Opportunities(JEO)Standard Life European Private Equity (SEP)
Lowland Investment Company (LWI)Pacific Assets (PAC)
HICL Infrastructure (HICL)Aberdeen Asian Smaller Companies Investment Trust(AAS)
British Empire Securities (BTEM)F&C Global Smaller Companies Investment Trust (FCS)

Taking the Global sector, which includes some of the largest and most popular trusts, three of Scottish Mortgage Investment Trust's board members have an investment in the trust greater than their annual fee, while three don't, although one of these was only appointed in 2014. Fund manager James Anderson has shares worth about £25m in the trust.
Four out of five directors of British Empire Securities & General (BTEM) have an investment in the trust greater than their annual fee. Fund managers John Pennink and Joe Bauernfreund own shares with a market value of about £2.17m and £1.1m, respectively, according to Mr Brierley.
Four out of six directors of Murray International (MYI) have an investment in the trust greater than their annual fee. David Hardie has less but was only appointed in 2014, but Lady Balfour of Burleigh has been on the board since 2003 and despite an annual fee of £23,000, only has £13,689 in the trust.
All the board of Witan (WTAN) with the exception of James Bevan have a holding in the trust larger than their annual fee - in some cases by a great deal. Chief executive officer Andrew Bell has a holding of £902,400 in the trust - nearly double his £486,602 remuneration.
Three out of four of the board of Law Debenture Corporation (LWDB) have an investment in the trust larger than their annual fee, while fund manager James Henderson has about £531,500 in the trust.
Only one out of four of Lindsell Train's (LTI) board have a holding larger than their annual fee. All board members have served for a number of years, some in excess of 10 years.
As at March 2014 fund manager Michael Lindsell held 5.38 per cent of the shares and co-manager Nick Train held 5.79 per cent.

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