The civil war in the Investment Association set tongues wagging across the City this year. The public issues for the body began when reports surfaced that major fund houses Schroders and M&G were considering quitting as a result of chief executive Daniel Godfrey's fee reform agenda, which he launched at the start of the year. Mr Godfrey had been encouraging fund bodies to sign up to a statement of principles launched in April 2015 which included pledges surrounding transparency over fees, but only one out of every eight members signed up.
By the end of October Mr Godfrey had been ousted by the rebelling members and Guy Sears, director of risk, compliance and legal, installed as interim chief executive. And it looks as though the IA's woes aren't over yet, with wealth manager St James's Place severing ties with the IA last week. Schroders and M&G have also said that they won't be renewing IA membership. Commentators have questioned what these developments could mean for the transparency of fund fees going forward.
The China question
Another ongoing topic throughout the year was the will-they-won't-they MSCI decision to include Chinese domestic 'A' Shares in its emerging market index. China makes up a large chunk of the MSCI Emerging Market index, but can only be invested in via shares such as 'H' shares, listed in Hong Kong, as opposed to the shares listed on China's domestic market. MSCI has been debating adding the shares to its emerging market index, but in June decided that the region needed to further liberalise first.
That may have caused some sighs of relief when the mammoth global stock rout led by China hit in August, sending Chinese stocks crashing back to earth. The market experienced its biggest falls since 2007. We took a look at the worst affected funds, which were spread across the 'A' Share, 'H' share and wider Asian market.
Although it abstained from including A shares, MSCI has made a significant move on China this year by deciding to incorporate foreign-listed Chinese shares into its indices for the first time. American Depositary Receipts are the shares of foreign companies traded in the US and the decision means 14 US-listed Chinese stocks will be added to the MSCI China and MSCI Emerging Market indices this month.
China was not the only area feeling the pain this year. Funds with exposure to commodities were also feeling the pinch. But that has been good news for ethical and socially responsible open-ended funds, which beat the FTSE All-Share index on average over one and three years and managed to outperform the FTSE 100 over one, three, five and 10 years. Their exclusion of mining and oil stocks will have had a large part to play in that.
Woodford steps out alone
One fund manager experiencing major success this year was high-profile former Invesco Perpetual manager Neil Woodford, who set up his new CF Woodford Equity Income fund (GB00BLRZQC88) in August 2014. The fund ended 2014 at the top of its fund sector, just months after launch, and in the year to June 2015 came top in the UK equity income sector, returning nearly 20 per cent. By August 2015 the fund had swelled to £6.7bn, taking it to a similar size as former Woodford fund Invesco Perpetual Income (GB0033053827). An exposure to small-caps has helped the fund achieve that performance, with the two holdings contributing most, Allied Minds (ALM) and 4D Pharma (DDDD), both boasting a market cap of under £1bn.
In April, Mr Woodford launched his second fund, Woodford Patient Capital Trust (WPCT), which invests in early-stage and early-growth companies. By the middle of the month demand for the trust had reached such a pitch that the fund increased the maximum size of its initial public offering (IPO) from £500m to £800m.
The trust started trading on 20 April, taking the title of the largest ever UK-domiciled investment company raising, even beating the £460m raised by star manager Anthony Bolton's Fidelity China Special Situations (FCSS) launch in 2010. By 22 April, WPCT was already trading at a premium to NAV, having moved to a share price of 102.2p following its launch at 100p a share.
In April, his first holding was revealed to be Sphere Medical Holding (SPHR), an Alternative Investment Market (Aim) traded stock providing monitoring and diagnostic devices for critical care. At the time, Mr Woodford said he expected around three-quarters of the portfolio to be held in early-stage companies, with 25 per cent in mature dividend payers to cover the trust's costs, as it does not charge an annual management fee.
By August the trust's NAV had grown by 3.1 per cent and its share price had increased by 13.5 per cent, leading Mr Woodford to issue shares to control demand. The trust currently has 65 holdings and is trading at a 4.5 per cent premium.
Smaller companies on top
Smaller companies were the place to be invested this year. The October RedZone report from Chelsea Financial Services found that funds in the IA's UK smaller companies, European smaller companies, Japanese and North American smaller companies sectors had returned most to investors. The report, which lists funds reporting only third- or fourth-quartile returns every year for the past three years, highlighted those four sectors as having returned more than 50 per cent on average to investors, with IA UK Smaller Companies returning 62 per cent.
This year we also put fund providers to the test to see how up-to-date their fact sheets were and what was missing from these vital documents. Because management groups are not legally required to produce fact sheets, there is a distinct lack of uniformity between them and many may miss crucial bits of information or be out of date. One issue is connected to the many different ways of calculating yield, which stops comparisons between income funds. Fact sheets also only reflect some of the costs of holding funds and do not show the underlying transaction costs. It is also hard to find lists of total holdings, which the majority of funds do not offer.
Fund manager ratings and exits
In January several of the rising star fund managers we highlighted in December 2014 were given the stamp of approval by FundCalibre. The managers to watch were:
Alex Savvides, JOHCM UK Dynamic Fund (GB00BDZRJ101)
Thomas Moore, Standard Life UK Equity Income Unconstrained (GB00B79X9673)
Hugh Yarrow, Evenlode Income (GB00B42KJH51)
Mark Martin, Neptune UK Mid Cap (GB00B909H085)
James Thomson, Rathbone Global Opportunities (GB00B7FQLN12)
The year also saw some high-profile fund manager exits. For the full rundown of the biggest exits and whether to follow them to their new funds or not, take a look our article in last week's magazine. But the big names we covered included:
Angus Tulloch, who ran Stewarts Asia Pacific Leaders and stood down as lead manager, handing over to David Gait and Sashi Reddy.
Robert Boag, manager of UK Commercial Property (UKCM), to be replaced by Will Fulton, who managed the Standard Life Heritage With Profits Fund for four years.
Bradley George, head of the commodities and resources investment team at Investec and manager of IC Top 100 Fund Investec Global Gold (GB00B1XFGM25), who stepped down to become managing director of the company's North America client group.
The war at Alliance Trust
Arguably the biggest story of the year in the closed-end fund world was the furore at Alliance Trust (ATST), where activist shareholder Elliott Advisors pulled no punches in demanding changes. In March 2015 the US hedge fund proposed the addition of three new directors to the board in order to add expertise and turn around the issues it perceived in relation to corporate governance and performance. Elliott was concerned about the persistent underperformance of Alliance Trust against its sector peers and benchmarks and high discount to net asset value (NAV), as well as the continued losses in two of the trust's operating subsidiaries, Alliance Trust Savings and Investments.
Later that month, private shareholder representative organisation ShareSoc came out in favour of Elliott's proposals to add board members and in April the issue was temporarily put to bed, with the trust agreeing to appoint two of Elliott's suggested members. In return, Elliot agreed to withdraw its challenge at the trust's AGM. The two sides also agreed on several mutual non-disparagement undertakings and Elliott agreed not to seek to agitate against the company, its board or management publicly until at least the 2016 AGM.
But in October the trust announced that high-profile chief executive Katherine Garrett-Cox was stepping down from the board of the 127-year-old company. The trust also introduced a raft of changes, to be implemented by 1 March 2016, including the introduction of a benchmark, cutting costs and targeting a single-digit discount. The board of Alliance Trust will now also become fully independent and comprised solely of non-executive directors, while Ms Garrett-Cox will continue as chief executive officer and director of subsidiary Alliance Trust Investors (ATI), which will also be separated from the trust with a distinct board of directors. A timeline was also introduced for ATI to achieve profitability.
Bad news at BlackRock World Mining
Another trust having an unhappy time was BlackRock World Mining (BRWM), hit by losses from its exposure to iron ore and its royalty investment in the Marampa mine, which it was forced to write down in October 2014, as well as a convertible bond. Both securities were issued by the ill-fated London Mining, which collapsed into administration at the end of last year. The trust reported a 26.5 per cent fall in net asset value (NAV) and a 30.4 per cent fall in share price for 2014 and underperformed its index over one, three and five years.
Later in 2015 the trust was suffering again at the hands of its exposure to gold miner Banro via golf-linked preference shares. The trust and BlackRock's pricing committee decided to reduce the value of its Banro securities following gold price weakness, resulting in a fall in BRWM's share price and NAV. The trust's managers claimed the high yields in the sector meant they were being paid to wait for margins to return in the commodities sector, but analysts were unconvinced. The discount remains wide, at 11.2 per cent.
Dividend worries at Scottish Mortgage
Scottish Mortgage (SMT) was another trust in high demand this year. The trust is also keen on unlisted companies and was forced to issue new shares as a result of overwhelming demand this year. In May the company issued 2.5m shares of 5p at a premium to NAV and just four days later announced a further issuance of 1m shares at 5p, also at a premium to NAV. The trust's results have been highly successful, in part due to its focus on unlisted tech stocks, which manager Tom Slater is keen on. Between September and October Scottish Mortgage had doubled private company exposure from under 5 per cent to 10 per cent of assets.
However, reduced earnings from the stocks it holds means the trust has warned of a potential threat to its future dividend stream. In May, it was forced to dip into its reserves to pay an increased dividend and said that, although it wanted to keep growing its dividend, depleting revenue reserves could clash with that desire.
Manager changes at top trusts
Two high-profile managers departed their trusts this year. Will Smith stepped down from City Natural Resources High Yield Trust (CYN) and handed over his responsibilities to Keith Watson and Robert Crayfourd.
Mark Mobius handed over the lead manager position at Templeton Emerging Markets to former senior vice-president Carlos Hardenberg. Mr Mobius continues to be a portfolio manager on the trust, as well as leading the Templeton Emerging Markets Group.
Murray moves to a discount and Biotech Growth turns 10
Finally IC Top 100 fund Murray International Trust (MYI) fell to a discount this year for the first time in five years on the back of disappointing interim results. The continued strength of sterling took chunks out of the once stellar trust's share price and failure to maximise Japanese gains also proved damaging. The trust remains on a discount of -0.3 per cent, although narrower than in August.
It was also a landmark year for Biotech Growth Trust (BIOG), which turned 10 in May and celebrated by topping Winterflood's list of best-performing investment trusts. The sector has experienced a sell-off recently, but the trust remains the top performing trust over five years, according to Trustnet data.
