- Calls have been made for investment managers to disclose holdings in their own funds
- As data on investment trust boards shows, big stakes can have both good and bad consequences
Industry figures have called for disclosure of the stakes portfolio managers have in the funds and investment trusts they run, arguing that investors should know who is “eating their own cooking”.
Interactive Investor has written to the Financial Conduct Authority and the Financial Services Consumer Panel calling for rules requiring fund managers to disclose their holdings, with investment trust analysts making a similar plea.
“While investment companies are required to disclose transactions by board members, there is no such requirement for managers,” said Ben Newell and Alan Brierley of Investec Bank's investment companies research team. “Given strong demand for such information, this is disappointing. Meanwhile, with regard to the announcement of board transactions, the majority no longer include the resultant holding, which arguably is the key piece of information.”
Non-executive boards of directors on investment trusts must disclose their shareholdings in their annual report and accounts, with market rules also requiring director dealings to be published. The same obligations do not apply to fund managers, although anyone with a substantial holding in an investment trust does have to report this. Because the threshold for reporting starts with a stake of 3 per cent, only fund managers with very large investments are captured.
Having a stake in a fund can align the interests of those running it with other investors. When it comes to investment trusts, the latest edition of a report by Newell and Brierley, 'Skin in the game', shows that many directors now tend to have a stake, an improvement from December 2010 when the first edition of the report came out.
The latest report finds that the aggregate investment of boards and managers in trusts comes to £4.79bn, a sevenfold increase on the £687m total from late 2010.
Chairmen and directors had significant stakes in vehicles such as wealth preservation trust RIT Capital Partners (RCP), North Atlantic Smaller Companies (NAS), private equity fund Oakley Capital Investments (OCI) and Caledonia Investments (CLDN).
Meanwhile, investment management teams had big positions in the likes of Pershing Square Holdings (PSHD), Apax Global Alpha (APAX), Scottish Mortgage Investment Trust (SMT) and Smithson Investment Trust (SSON), among others. Some 51 chairmen or directors and 77 management teams had holdings worth more than £1m.
The past decade has also seen a significant increase in female board representation, with the percentage of women directors rising from 8 per cent in 2010 to 34.5 per cent.
Too much of a good thing?
Investors should remember the perils of too much “skin in the game” where big stakes can give managers too much influence at a trust. Investec’s analysts have pointed to the case of JZ Capital (JZCP), where the investment managers each own around 13.6 per cent of ordinary shares and a series of unsuccessful initiatives have led to abysmal performance. While the trust's shares have performed well in the past year, longer-term performance has been extremely weak: shareholders would have lost nearly 70 per cent in total return terms in the five years to 10 June 2021.
Skin in the game has caused trouble elsewhere: at listed hedge fund Third Point Investors (TPOU), measures have been introduced to address a persistently wide discount, but recent comments by investment manager Dan Loeb appearing to dismiss discount concerns have worried some investors, given he has a large stake in the trust.
Elsewhere, Gabelli Value Plus Trust (GVP) was among several investment trusts facing continuation votes in 2020. The trust’s board had recommended shareholders vote against continuation and force the fund to wind up, and nearly two-thirds of votes cast were against continuation. But in September the trust announced that Mario Gabelli, who owned 27.8 per cent of voting rights, had indicated he would not support proposals for a voluntary liquidation of the company. As the analysts put it, this was “effectively a blocking stake” due to a requirement for 75 per cent of votes cast to pass the proposal. The board then sought to return capital to investors via a tender offer, something that only requires a majority vote to pass.
More generally, a manager investment is no guarantee of success. Neil Woodford had substantial amounts invested in what was then the Woodford Patient Capital Trust, for example.
The structure of any requirements for directors to hold shares can also be important. The Scottish Mortgage board recently proposed to drop a historic requirement for directors to hold shares in the trust having an aggregate value of £250,000. Following years of share price rises, this rule means a new director would recently have needed to buy 5,000 shares at a cost of nearly £57,000. The board said this was not conducive to “attracting a diverse range of candidates”.
