Is this a smarter way to find a ‘hidden gem’ investment trust?

Self-managed trusts have many attributes that are appealing to investors. Fiona Hamilton examines their credentials.

Until the 1960s, almost all investment trusts were self-managed. They were standalone trusts, with boards of directors that entrusted the portfolio to one or more managers who focused solely on the trust and were therefore not distracted by other commitments.

Both boards and managers often had, or accumulated, significant shareholdings, thereby aligning their interests with those of all other shareholders. Over time some of these trusts have been taken over and broken up by other institutions. Others, such as the venerable F&C Investment Trust, formed management companies that won mandates to run other trusts or launched new ones. Over time they also diversified into running other investment products such as open-ended investment companies (Oeics) and pension funds.

Having more assets under management has enabled such management groups to enlarge investment teams – providing continuity if someone is ill, leaves or retires – and to spread the costs of administrative back-up and marketing.

The snag is that in order to pay for greater investment in staff, technology, compliance and other facilities, as well as turn a profit, asset-gathering has become a priority for many of these groups. That is especially true in an environment of downward pressure on management fees. As a result, fund managers can be diverted from their investment duties as well as being required to divide their time between a variety of portfolios.

There are now less than a dozen UK-domiciled, self-managed trusts listed on the main London Stock Exchange. The table shows they vary widely in terms of age and size. Most aim to be long-term core holdings; the majority can or do invest internationally; and some, notably Personal Assets and RIT Capital Partners, put an exceptionally high emphasis on capital preservation. The latter-named trusts have tended to lag in bull markets but make up for it in setbacks.

Please click here to enlarge table for self-managed trusts key facts

Small version of table showing key facts and board shareholdings in self-managed trusts

 

No institutional diversions

Despite these differences, the cohort’s self-managed status gives the trusts a number of attributes in common. The ability to focus exclusively on one portfolio and to avoid ‘institutional diversions’ is deemed a critical advantage by the managers of trusts as diverse as the 131-year-old Scottish Investment Trust and the 18-year-old Independent Investment Trust.

This was the reason that Ian Rushbrook built a 29 per cent stake in Personal Assets and spun it out of Ivory & Sime in 1990, aiming to manage it expressly for private investors, free from policy restrictions. A notable result was that Personal Assets had virtually no equity exposure at the height of the 2008 crash.

It is also credited with revitalising the fortunes of Picton Property Income Trust since it was spun off from Dutch group ING in January 2012. ‘It is now the only thing we do, and it allowed us to create a strong alignment between staff and shareholders through a long-term incentive plan,’ explains chief executive Michael Morris.

The Independent Investment Trust was formed by several leading Edinburgh investment managers to manage large chunks of their own money. Other shareholders were courted to achieve ‘a critical mass’ of around £100 million. Founder manager Max Ward says that having achieved that level of support, the trust has avoided issuing any more shares, on the basis that ‘every extra pound under management makes it harder to manage’.

Nevertheless, its subsequent success has lifted assets to over £350 million, with Ward’s stake now worth around £30 million and chairman Douglas McDougall’s around £60 million.

Ward and McDougall were both previously at Edinburgh-based partnership Baillie Gifford and they have continued to work closely together. ‘I tend to be a gullible enthusiast, whereas Douglas is more of a hardened cynic, so he acts as a great foil,’ Ward says.

This combination of a chairman and manager who get on well, and who both have decades of investment experience and hefty stakes, is ideal for a self-managed trust.

Although Independent has the ability to invest internationally, Ward has focused its concentrated portfolio on UK equities, with the majority of its 30 or so holdings in smaller companies, because they offer the greatest opportunities for ‘ten baggers’ (investments that return at least 10 times the original stake).

At its last financial year end, on 30 November 2017, Independent’s average annual NAV total returns since launch were 13.7 per cent, compared to 5.4 per cent from the FTSE All-Share index, and exceeded even the stellar returns from Scottish Mortgage Trust, which Ward managed from 1988 to 2000.

Research has convinced Ward that running his winners is the key to success. For example, Aim-quoted Blue Prism and Fever-Tree Drinks represent 15 and 10 per cent of Independent’s portfolio respectively. Ward says over 90 per cent of fund management groups would balk at this level of concentration, but Independent’s self-managed status allows him to hold unusually large stakes, with the board’s agreement.

Ward’s dedication to unearthing ‘exceptional winners’, rather than worrying about benchmarks or the direction of markets, is also supported by his fellow directors. But they warn that their unusually bold approach can result in unusually poor results, as in 2008 when Independent’s NAV per share suffered one of the steepest falls in the global sector. However, it bounced back exceptionally strongly in 2009, and Ward hopes returns will hold up better in any future sell-off as he now avoids companies with dodgy balance sheets.

Independent’s miserly ongoing costs of just 0.25 per cent illustrate another potential advantage of self-managed trusts. Rights & Issues IT, which has an even more concentrated portfolio of UK smaller companies, also has very low charges for its sector, as does Scottish IT.

Charges are higher for self-managed trusts that are internationally diversified but achieve this goal by adopting a multi-manager approach, either partially or fully. Caledonia Investments, RIT Capital Partners and Witan have all taken this route and were joined in 2017 by Alliance Trust.

The first three-named are all chaired by members of their founding families, which still have very substantial shareholdings, so they have the unusual appeal of offering a genuinely multi-generational approach. This implies being reasonably careful and well-diversified, as well as keeping the wider family and other shareholders happy with sustainable dividend progression.

 

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