One in 10 investment trust board directors have no ‘skin in the game’

A total of 6% of chairman have no shares in the trust they oversee.

Funds and Investment Trusts November 8, 2019 by Tom Bailey

One in 10 investment trust board directors have no personal investment in the shares of the trust they oversee, according to a report released by Investec.

The report found that a total of 16% of directors had no personal investment in in the trust they oversaw. However, excluding those who had been appointed only within the last year (and who may not have purchased yet), that fell to 10%. That figure was slightly up from 2018’s figure of 9%, although below 2014’s figure of 12%.

Moreover, a total of 6% of chairman had no shares in the trust they oversaw. Some of the most well-known trusts had board chairmen with no investment, including Aberdeen Standard Asia Focus, Lindsell Train, BlackRock Smaller Companies, and RIT Capital Partners.

Numbers for investment by management team are harder to quantify as there is no requirement for disclosure. However, where possible the report did identify management and management teams with large stakes in the trust they manage. The Rothschild family in RIT Capital had the most skin in the game, with £703 million invested in the trust they manage, followed by the management teams of Pershing Square (£668 million) and Tetragon (£257 million).

The report identified a total of 31 managers with more than £10 million invested. A total of 50 managers had skin in the game of more than £1 million.

However, the figures showing that one in 10 board directors have no holdings may be troubling for investors who place weight on the importance of skin in the game for fund management. Having the board and managers directly invested in the trust they oversee sends “a clear and powerful message”, according to Investec, that the interest of the board, management and investors are aligned.

As the report notes: “Shareholders expect directors and managers to have a meaningful personal investment in the companies which they direct and/or manage in order to align interests.”

However, the report did also find that skin in the game does not always guarantee good returns, especially if management holds a large stake.

For example, the report identified JZ Capital as having significant skin in the game, with aggregate investments of £100 million. Despite this, over the past five years JZ Capital delivered shareholders a total return of just 25%, significantly below its peer groups return of 102%. At the same time, the average discount over the past five years has been 37% compared to the trust’s peer group’s average of 17%.

Despite this, management was still awarded base and performance fees totalling $128 million in the five years to February 2019.

The report concludes that “skin in the game is not a panacea for superior returns”. In regard to JZ Capital, the report suggests that significant stakes by management may have given management too much power, in turn weakening corporate governance.  

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