Most investment trust management groups seek to play down the importance of individual managers, typically by talking about their strong investment processes and team-based approach. However, history shows that a change in a trust’s lead manager can have a big impact. This can be for better or for worse, so investors should always take note.
If the trust has had a disappointing run, a change in personnel can transform its returns for the better, with a tightening discount accelerating gains in the share price. Examples include TR European Growth trust (TRG) since Ollie Beckett took charge in 2011, Standard Life Equity Income (SLET) since Thomas Moore took over in 2011, Fidelity Special Values (FSV) since Alex Wright succeeded Sanjeev Shah in September 2012, Monks Investment Trust (MNKS) since Charles Plowden and his team overhauled its approach and its portfolio in March 2015, Pacific Horizon (PHI) since Ewan Markson Brown was drafted in as lead manager in March 2014, and Atlantis Japan Growth fund (AJG) since Taeko Setaishi replaced Ed Merner in May 2016.
Hopes are likely to be particularly high if the new manager has strong credentials, typically from successful management of a similar open ended remit. When that is the case, the share price discount on his or her new charge may tighten almost immediately. It could widen out again if net asset value returns do not pick up as quickly as hoped – as was the case at Monks and Atlantis Japan Growth, for instance. However, investors in both have been handsomely rewarded if they were prepared to keep faith.
Discounts are likely to be equally sensitive to potential changes for the worse, such as the unexpected departure of an admired manager. Investors may be keen to bail out quickly, but hesitate when they see the share price has been radically marked down. If the trust has a specialist remit, a high active share (in other words, if it diverges substantially from its benchmark index), or has been very actively managed, it may make sense to move on despite the share price downturn.
A recent instance was the plunge in the shares of River & Mercantile UK Micro Cap Trust (RMMC), when it was announced that manager Philip Rodrigs had been ousted following investigations into a professional conduct issue.
Rodrigs’ enthusiasm to manage a closed ended vehicle focusing on ultra-small UK quoted companies was the driving force behind the trust’s December 2014 launch, and he had achieved dazzling returns over its first three years. As a result the trust was trading on a double-digit premium. So when the news of his departure broke, it was no surprise that the share price plummeted around 20 per cent to a discount of over 6 per cent; it was more surprising that it briefly recovered to trade close to par.
Winterflood Securities, who are brokers to the trust, sought to console investors by stating that ‘there is still a large opportunity in the micro-cap segment of the UK market for a genuinely active manager to add considerable value as a result of market inefficiencies’, adding that RMMC’s unusual ability to return capital to shareholders when its assets exceed £110 million provides it ‘with huge advantages’.
However, successful stock-picking at the lower end of the quoted universe requires considerable flair; when RMMC’s board confirmed that Rodrig’s assistant George Ensor would be taking over as lead manager, it was hard to see why the trust should continue to trade on an exceptionally tight discount for its sector.
Carlos Hardenberg’s unexpected decision to quit as manager of Templeton Emerging Markets IT(TEM) from the end of March 2018 was also a shock, as he had revived TEM’s fortunes since taking over from Mark Mobius in October 2015. Its discount promptly widened from 9 to over 11 per cent, where its board typically starts buying in shares.
Sanguine about change
Brokers such as Numis Securities and Stifel were, initially at least, comparatively sanguine about the change, on the basis that Hardenberg would be handing over to Chetan Sehgal. Sehgal has worked for Franklin Templeton’s emerging markets team since 1995.
He and Hardenberg are both supported by the same globally dispersed research team, and are both members of the senior management team, which decides which of the ideas generated by the firm’s analysts should be incorporated into their portfolios. They have jointly managed a number of portfolios, and TEM has a 90 per cent overlap with the sizeable US-listed Templeton Developing Markets Fund(TDMF) which Chetan manages.
It may yet turn out to be business as usual. But Hardenberg had worked closely with Mobius before taking over, and that did not stop him making significant changes, such as tempering the trust’s value emphasis and investing around a third of the portfolio in technology-related companies. Would the shift in emphasis in TEM and TDMF’s portfolios have taken place without Hardenberg’s input? Will Sehgal revert to a more cautious approach once he has gone?
An added worry was why Hardenberg had suddenly upped sticks. Winterflood pointed out that there had been several recent top-level changes at Franklin Templeton, and some of Hardenberg’s colleagues were also leaving. It therefore removed TEM from the Winterflood recommendation list ‘until it becomes clearer as to the future direction of Franklin Templeton with regard to its emerging markets equities team’.
The broker’s speculations were reinforced when it was announced that Franklin Templeton’s former emerging markets guru, Mark Mobius, is emerging from retirement to launch a new fund focused on bringing environmental, social and governance improvements to companies in the developing world.
Past departures with similarities to TEM’s and RMMC’s recent travails include Stuart Widdowson’s February 2017 decision to resign as the highly rated manager of Strategic Equity Capital (SEC) and join Harwood Capital. Having rebuffed suggestions that it should move its mandate to Harwood, SEC has achieved modest progress under Widdowson’s former colleague and successor Jeff Harris, who is supported by a five-strong team and a number of experienced advisory panel members. But despite a recent cut in both its base management fee and the performance fee, SEC’s shares now trade persistently on a double-digit discount.
The impending departure of Sarah Whitley as manager of Baillie Gifford Japan (BGFD) is very different, in that it was announced more than six months in advance. Whitley has been with Baillie Gifford 37 years, and has headed its Japanese investment team since 2001, so her retirement was to some extent predictable.
Some commentators expect her handover of the trust to prove admirably smooth, in that her successor Matthew Brett has been attending BGFD’s board meetings since 2008 and he and Whitley have co-managed the open-ended Baillie Gifford Japanese fund. In addition Baillie Gifford prides itself on its team-based approach to share selection.
However, Whitely has been pre-eminent within BG’s Japan team for well over a decade, and has been perennially and sometimes defiantly optimistic about Japanese markets. As a result BGFD has been consistently among the most highly geared trusts in its sector. This has contribute substantially to its longterm success, as has Whitley’s bias towards medium to small companies, whereas the far larger open-ended fund has more in larger companies.
It will be interesting to see whether Brett can maintain her success sufficiently to retain the trust’s demanding premium, or whether she proves as hard to follow as that other great believer in medium to smaller companies, Fidelity’s Antony Bolton.
BlackRock Throgmorton (THRG) provides another example of the difficulties presented by management changes. Its NAV total returns have been among the best in its sector over the last five years, during which its long-only portfolio has been managed by Mike Prentis. However, its discount has been persistently wider than that of BlackRock Smaller Companies trust, which Prentis also manages. The latter uses conventional gearing, whereas THRG can gear up or go short of the market or individual stocks by investing in CFDs.
THRG’s board has been frustrated by the discount differential between the two trusts, so has made changes to render them less similar. In particular Dan Whitestone, who has managed THRG’s CFD portfolio for several years, will now manage its whole portfolio. In addition THRG’s remit has been widened to permit unlimited exposure to companies listed on the Aim market and up to 15 per cent in stocks quoted overseas.
For Mike Prentis’s fans this is a frustrating change. He may sit beside Whitestone, but he is no longer directly involved, and what is the point of the change if it is not going to make a significant difference? On the other hand, gearing through CFDs rather than conventional gearing could prove a big advantage if recent market volatility recurs.
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