Keeping it in the family can benefit investment trusts

A number of investment trusts were originally set up by wealthy families to manage their wealth, and in some cases family members are represented on the board. These include some well-known global growth trusts such as Personal Assets (PNL), RIT Capital Partners (RCP) and Caledonia Investments (CLDN). The families argue that because they are looking after their interests, as well as the other shareholders, this aligns their interests.

Hansa Trust (HAN) has been closely associated with the wealth of the Salomon family since the 1950s. "I've spent 20 years in the investment management industry, working within larger, institutional groups which ultimately are focused on the growth of assets," argues Alec Letchfield, chief investment officer at Hansa Capital Partners which runs the trust. "Our primary focus is on generating long-term performance with our biggest investor, William Salomon, sitting at the end of the room. It creates a real alignment of interests that is fundamental to everything we do. We are about multigenerational, long-term capital appreciation, with a long-term investment horizon which is not beholden to indices."

Because these trusts are looking after wealth already built up, in many cases they have a focus on wealth preservation rather than growth, and they are typically multi-asset funds that aim to protect downside. They are also likely to take a long-term investment view.

Wealthy families tend to like dividends so some of these trusts are good if you want growing dividends, although they are not focused income mandates so will not offer the highest yields. For example, Caledonia has increased its dividend for 48 consecutive years, Brunner has increased it for 43 and Witan has increased it for 40.

Wealthy families also want their assets managed well so they are likely to get highly-skilled managers to run the trusts.

Although some trusts with a family connection have a wealth preservation focus they differ to Targeted Absolute Return funds in that they look to mitigate downside via a multi-asset approach, rather than using hedge fund techniques such as short selling and derivatives.

Some trusts are very effective at doing this, for example, RIT Capital's share price fell 14 per cent in 2008 and Personal Assets' share price fell only 3 per cent, against falls of about 30 per cent for the FTSE All-Share and 17 per cent for FTSE World ex UK indices.

Source: Morningstar

Downsides

If one shareholder has many shares this could potentially reduce the liquidity of the shares - how easy they are to buy and sell. This is more of a problem for smaller trusts where there are fewer shares, and could result in a wider bid-offer spread - the difference between the buying and selling price.

Although the Rothschild family holds 18 per cent of RIT Capital's shares it has a market capitalisation of £2.3bn and average daily traded shares are 115,000.

Caledonia has a market capitalisation of £1.2bn but daily traded volume is only 25,000. Witan's (WTAN) market capitalisation is a similar size at £1.4bn but the family interest is very small and it has a higher average daily level of traded shares at 152,000.

Having less trading can also cause the discount to net asset value (NAV) to widen. Caledonia, for example, trades at a discount to NAV of around 20 per cent, and has been at double-digit levels for the last few years, although this may also be due to its large allocation to unquoted investments which account for around a third of assets.

If a family owns a large stake in a trust it may be reluctant to buy back shares as this would increase its stake further. And as long-term intergenerational holders, narrowing the discount may not be a priority for them.

Before investing in one of these trusts you should check the size of the free float and the bid offer spread.

Discounts and trading

Source: Morningstar as at 29 September, *AIC, **Witan & ***Hansa

Having a family as the dominant shareholder means the trust is run in its interests and if smaller shareholders are not happy with something they may not be able to effect change.

"If one of these trusts is aligned with what you want, great, but if not you are in no position to force change," says Matthew Read, senior analyst at QuotedData. "And if there is a problem a trust with a dominant long-term shareholder could be slower to change."

"Make sure you know who the large shareholders in any investment trust are and what their objectives are," adds Simon Elliott, head of the investment trust research team at Winterflood.

Not all the trusts with a family connection have a capital preservation focus as their objective. IC Top 100 Fund Witan Investment Trust was set up to hold the Henderson family's wealth but it now holds a very small percentage of the trust's shares - 0.6 per cent - although the chairman is Harry Henderson. The trust has a growth focus with most of its investments in equity funds.

Witan is a good option for global growth and has outperformed the FTSE All-Share and the FTSE World ex UK indices, as well as its peer group average, over one, three and five years. It's a multi-manager fund so it gives you exposure to a wide range of funds that you might not be able to access yourself as a private investor with smaller amounts to invest, and it has a reasonable ongoing charge of 1.02 per cent.

Trusts that do have a more defensive stance can lag mainstream indices and other Global Growth investment trusts in rising markets.

All the trusts are slightly different to each other so check what their investment objective is before you put your money into them, and make sure it matches yours.

Portfolio uses and trusts

With market volatility likely to continue as the US and UK prepare to raise interest rates, and concerns mount over China's economic slowdown, a trust with a defensive orientation could be a useful portfolio addition.

In larger portfolios trusts such as Personal Assets and RIT Capital could be used as a more defensive holding, while in smaller portfolios they could also be useful as a core holding as they offer exposure to various assets.

Mick Gilligan, head of research at Killik & Co, likes Personal Assets Trust, which we count as an IC Top 100 Fund and recently tipped as a 'buy'. This has a multi-asset portfolio that includes gold, and because of its defensive stance it has lagged its global growth sector peers over three and five years. But it delivered a good performance in 2014, boosted by healthy returns on consumer defensive stocks, index-linked government bonds and a strong US dollar.

"While performance has been somewhat pedestrian this year it is likely to provide valuable insulation to any further equity market downside," says Mr Gilligan. "We continue to like the portfolio diversification, focus on valuation and importance placed on capital preservation."

Personal Assets Trust has a strict discount control policy so that it trades close to NAV. At the moment it can be picked up on a slight discount so now could be a good entry point: the strict discount control policy means it is unlikely that the discount will get wider and it might move back to a slight premium.

The trust's ongoing charge of 0.93 per cent is lower than a number of multi-asset and wealth preservation funds.

But Mr Gilligan adds: "Portfolio performance is heavily dependent on asset allocation policy. If historic correlations (or lack of) between asset classes break down this may result in larger than expected losses during periods of market stress."

Analysts at Winterflood have RIT Capital as one of their recommended Global funds, and we count it among the IC Top 100 Funds. It takes a cautious wealth preservation approach and is highly diversified, with unquoted investments accounting for 23 per cent of assets. It was impacted by its defensive approach over the last few years, resulting in underperformance against the index in 2012 and 2013. However, following a management shake-up, and successful stock-picking and currency strategies the fund has returned to growth.

The trust's chairman is a family member - Lord Rothschild.

"We continue to view RIT Capital Partners as providing attractive defensive global exposure," comment analysts at Winterflood. "This investment trust has many of the attributes of a family office reflecting the influence of its founder and largest shareholder, Lord Rothschild. It has developed a strong long-term track record through a top-down investment approach and exposure to some of the world's leading investment managers. The aim is to capture greater participation in up markets than down markets, with the rationale that this will lead to both long-term outperformance and capital preservation."

The trust typically trades at a slight discount to NAV.

Caledonia has delivered good returns against broader indices and its peer average over three years, so at a discount to NAV of about 20 per cent some analysts argue that it offers value. It has also recently agreed to sell a stake in one of its unquoted holdings, TGE Marine, which analysts at Numis estimate will add 1.3 per cent to NAV. Performance has picked up since 2010 when a new chief executive, Will Wyatt, was appointed who made a number of changes to the trust's investment strategy.

"With Caledonia there is a large family stake - in fact a little too large, some would argue, as the Cayzer interests now exceed 48 per cent," says John Newlands, head of investment companies research at Brewin Dolphin. "This hampers any active discount buyback policy, which if taken too far would push the family into Takeover Panel territory. But I do note that Caledonia's performance has picked up of late and there is certainly potential there for discount spotters to get involved."

Performance

Source: Winterflood, as at 29 September 2015 & *AIC