Company directors and fund managers who invest in their own trusts offer investors a clear sign of confidence in their abilities and a promising path to prosperity. Fiona Hamilton examines who does – and who doesn’t.

When assessing the attractions of an investment trust, investors should check out the board of directors’ holdings in the trust’s shares. Check, too, whether the trust manager’s holding is sizeable. 

If a director has minimal holdings, investors should immediately ask why. Do they have insufficient confidence in the trust’s remit or the manager’s ability, and if so what are they doing about it? 

Alan Brierley, head of investment companies research at Collins Stewart, contends that ‘personal share ownership sends a powerful message to existing and potential investors’. He has published research into which boards of directors have ‘significant skin in the game’. 

The research shows that there are more than 30 trusts where every non-executive director holds a share stake worth more than their annual fee, and in many cases significantly more. The trusts concerned include Monks Investment Trust, Personal Assets Trust, Scottish Investment Trust, SVM Global Fund, Lowland Investment Company, F&C US Smaller Companies Trust, Aberdeen New Thai Investment Trust and Herald Investment Trust. 

Not all of these have done brilliantly. But investors can at least be confident that their directors are sharing the pain of any disappointing performance and hopefully taking action. 

Brierley also explores which fund managers are ‘eating their own cooking’ – by holding sizeable stakes in the trusts they manage. Unlike directors’ shareholdings, managers’ holdings do not have to be declared in the annual report so are harder to identify. However, where a holding can be confirmed, the manager’s commitment can be relied on. Where a manager has a very large stake in a trust, he is much less likely to abandon it.

Excluding the family-controlled trusts (covered in the text below),
Brierley reckons that the largest declared fund manager stakes as at the end of November 2010 were as follows: Christopher Mills (£35.5 million in North Atlantic Smaller Companies), Max Ward (£10.2 million in Independent Investment Trust), the management teams at HgCapital Trust (£32.9 million) and Aberforth Smaller Companies Trust (£20.7 million), and Alex Darwall (£9.6 million in Jupiter European). The manager/director combination at Caledonia Investments also ranks highly. 

Clearly, these managers and those highlighted in our table are passionately interested in their trusts’ success.

Trusts where the boards appear to lack confidence – with total shareholdings valued at less than a year of fees – include most Japanese trusts and, more surprisingly, several Asian trusts. These include Edinburgh Dragon, Fidelity Asian Values and Invesco Asia, all of which achieved above-average performance in their peer group over the past five years. The directors of JPMorgan Emerging Markets are also disappointingly unenthusiastic, as are those of Baring Emerging Europe and Advance Developing Markets.

Those who lost patience with Roger Guy before he quit Gartmore may be unsurprised to see that only one of the four Gartmore European directors had a stake in its shares. 

On the other hand, the four directors of JPM Overseas missed out considerably by failing to back Jeroen Huysinga after he took charge in September 2008. Their holdings were worth just £18,720 compared with annual fees of £99,000. Two of the four have been on the board for nine years or more. 

Some directors can afford to purchase larger stakes in trusts than others and new directors may take time to build their shareholdings. Nonetheless, if most of a trust’s directors have received far more in fees over the years than they have committed to buying shares, it seems fair to ask whether their interests are sufficiently aligned with those of shareholders.

Directors’ fees are typically between £20,000 and £40,000 a year, plus expenses and trips abroad for the directors of some overseas trusts. This can be a welcome source of income for retired or semi-retired non-executive directors. It is reassuring – to say the least – if they have a significant holding in the trust’s shares. 

Director commitment to maximising shareholder value matters because an experienced and highly motivated board can improve a trust’s fortunes. 

One of their most important duties is to monitor the fund manager and demand a change of personnel or management house if performance is poor. 

The directors must make sure their trust’s charges and running costs are kept as tight as possible too, thereby preserving a key advantage over open-ended fund rivals. 

They must also agree gearing parameters with the trust’s managers and help them if they get into difficulties on this front. The boards of Scottish Mortgage Trust, Jupiter European Opportunities Trust and Schroder UK Growth Fund were credited with providing invaluable support when these funds proved to be over-geared in the 2008 crash. 

Trust boards are intimately involved in structural changes. They can provide guidance on the issuing of zero dividend preference shares or subscription shares, for example, both of which can help grow funds under management but may affect the value of other share classes.

They may advocate changes to a trust’s remit if they believe it has lost its appeal, as in Utilico’s recent decision to concentrate less exclusively on infrastructure and utilities, and propose mergers with other trusts.

It is therefore critical that a trust’s board includes a varied range of experienced individuals who are focused on championing shareholder interests, even if this threatens their role as non-executives.

A series of corporate governance reforms have gone a long way towards ensuring boards get their priorities right. For instance, most boards now include few, if any, in-house directors and all directors must stand for re-election every third year, or annually once they reach 70 or have been on a board for more than 10 years.  

Directors are now drawn from a much wider range of backgrounds, reducing scope for favour swaps between the ‘City mafia’. An increasing number are mid-career and less financially reliant on their directors’ fees. 

Nonetheless, some trust boards are suspected of not being as open to change as they ought to be, while some trusts soldier on independently when their shareholders would be better served if the trust was merged with another trust or wound up. 

If the directors have sizeable shareholdings in their trusts, they will have a greater incentive to make shareholder-friendly decisions. 

Spotlight on family trusts

The share registers of a number of investment trusts are dominated by family shareholdings.  

In such cases, at least one member of the family sits on the board of directors and is able to exert a significant influence. Prime examples include Caledonia Investments, RIT Capital Partners, Hansa Trust, Manchester & London and London & St Lawrence.

Given the size of their shareholding, such families are already wealthy and are usually keen to pass on that wealth to future generations. As a result, they tend to put as much emphasis on wealth preservation as on wealth creation. Investors in family-controlled trusts should therefore be prepared for a cautious approach. Because of this, such trusts may lag more bullish peers in a rising market but make up for this in harder times. 

Families differ in their composition and attitudes, and so do family trusts. Investors need to check out their approach. Caledonia Investments, for example, recently said it intends to put more emphasis on income growth and is adjusting its investment portfolio accordingly. Meanwhile, RIT Capital Partner, overseen by chairman Lord Rothschild, says its primary focus is on
capital growth. 

Caledonia and RIT favour investing in a broad mix of asset classes and  subcontract large parts of their portfolios to other trusts and funds. 

In contrast, Manchester & London mainly invests in UK-listed equities, most of which have significant overseas interests. 

It therefore depends heavily on the sharepicking skills of manager and major shareholder Mark Sheppard.

Hansa Trust is different again. It has a third of its portfolio invested in a Brazilian company with port and oil servicing interests. About a quarter of the balance is invested in an internationally diversified portfolio of funds and hedge funds, and the rest in a spread of mainly UK-quoted companies. 

Money talks: Managers' investments above £500,000