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Does your investment trust have skin in the game?

If investment trust boards and managers invest their own money in the funds they run it can reassure investors
May 3, 2018

Investment trusts are companies listed on the stock market so have a board of directors. These fulfil a number of functions relating to the running of the trust, including appointing and dismissing the trust's investment manager, and setting its level of fees. Boards are also responsible for deciding whether to buy back or issue shares to control discounts or premiums to net asset value (NAV), and they decide how much debt (gearing) a trust can have.

Because of boards' key role in running investment trusts, some argue that they and the investment managers should have their own money invested in them.

"To align interests, investors look for directors and managers to have a meaningful personal investment in the companies they direct and/or manage," says Ben Newell, analyst at broker Canaccord Genuity. "We have never met one investor who has argued against this, and strongly believe that 'skin in the game' sends a clear and powerful message to both existing and potential investors."

“Knowing that an investment trust's managers and board directors are in the same boat as them when markets are difficult can be reassuring to shareholders”, adds Jason Hollands, managing director at wealth manager Tilney Group.

So Canaccord Genuity regularly produces a report outlining how much managers and board directors have of their own money in the investment trusts they run, and the latest edition covers 283 investment trusts. It found that 58 chairmen or directors of these have a personal investment in the trust they are involved with worth more than £1m, and 67 managers or management teams have in excess of £1m in the trust they run. The total investment made by all boards and managers in the trusts included in the report is £2.04bn – more than double the £687m boards and managers had invested in 2012 when the first of these reports was published. 

 

Top 20 directors with a personal investment in excess of £1m

TrustDirectorValue (£)
RIT Capital Partners Lord Rothschild OM GBE and Family 336,781,000
Tetragon Financial Group Reade Griffith 108,940,000
North Atlantic Smaller Companies Christopher Mills 97,149,000
Independent Investment Trust Douglas McDougall OBE 60,885,000
New Star John Duffield 45,784,000
Tetragon Financial Group Paddy Dear 37,121,000
Caledonia Investments Will Wyatt 30,573,000
Independent Investment Trust Max Ward 30,066,000
Hansa Trust William Salomon 21,698,000
Value & Income Matthew Oakeshott 20,008,000
SynconaThomas Henderson 17,868,000
Better Capital Jon Moulton 14,223,000
North Atlantic Smaller Companies Peregrine Moncreiffe 11,108,000
Monks Douglas McDougall OBE 11,026,000
Caledonia Investments Jamie Cayzer-Colvin 10,032,000
Witan Harry Henderson 8,198,000
Lindsell Train Michael Lindsell 7,512,000
Independent Investment Trust James Ferguson 6,984,000
Warehouse REIT Simon Hope 6,778,000
Independent Investment Trust The Hon. Robert Laing 6,390,000

Source: Canaccord Genuity as at 20/04/18

Top 20 managers/teams with a personal investment in excess of £1m

TrustManagerValue (£)
RIT CapitalLord Rothschild OM GBE and Family 336,781,000
TetragonReade Griffith/Paddy Dear & management team 185,349,000
Apax Global AlphaManagement Team 170,700,000
JZ Capital Partners David Zalaznick/Jay Jordan 104,237,000
North Atlantic Smaller CompaniesChristopher Mills 97,149,000
Scottish Mortgage Management team 82,900,000
Riverstone EnergyManagement team 75,127,000
Pershing Square Holdings Management Team 74,212,000
Manchester & London Mark Sheppard 56,177,000
New Star John Duffield 45,784,000
Caledonia Will Wyatt/Jamie Cayzer-Colvin 40,605,000
Aberforth Smaller Companies Management team 38,429,000
Independent Investment Trust Max Ward 30,066,000
Macau Property Opportunities Tom Ashworth/Martin Tacon 24,952,000
HG Capital Trust Management team 24,817,000
Jupiter European Opportunities Alex Darwall 24,310,000
Value & Income Angela Lascelles/Matthew Oakeshott 22,173,000
Hansa Trust William Salomon 21,698,000
Syncona Thomas Henderson 17,868,000
Aberforth Split Level Income Management team 15,643,000

Source: Canaccord Genuity as at 20/04/18

But 14 per cent of board directors have no personal investment in the trust they run, compared with 19 per cent in 2012. However, once you exclude directors appointed in the past year, this falls to 9 per cent, compared with 14 per cent in 2012.  

The report also found 17 board chairmen involved with 6 per cent of the trusts analysed have no investment in the trust they chair. And 30 chairmen who have been on their respective boards for at least five years have a shareholding valued at less than their annual fee.

 

Is skin in the game necessary?

Although many investors like to see a board and its managers investing their own money in the trusts they run, there is no evidence that this leads to better performance.

David Liddell, chief executive of online investment service IpsoFacto Investor, thinks that whether a trust's managers invest in it matters more in some sectors than others. For example, skin in the game in a smaller companies or private equity trust would suggest its managers are strongly confident of their abilities in these riskier, harder-to-research markets.

But when deciding whether to buy a trust Mr Liddell does not take into consideration whether boards and managers have their own money in it. Instead he focuses on the trust's holdings, investment style, performance, gearing levels, discount or premium to NAV, and fees.

"The prevailing assumption is that it's generally good for trusts to have skin in the game, but it is equally possible to argue the other way around, that it potentially clouds a board's objectivity," he explains. "It depends on the amount that's being invested and whether it is material to the person involved. If it's not a material amount for the person concerned, then it doesn't make too much difference either way."

But if boards and managers have a material amount invested in the trusts they run this could lead them to taking greater or less risk than is necessary. And it is not easy to establish what represents a material amount to a trust's directors and investment managers, in particular the latter. This is because while board directors need to disclose their interest in a trust, investment managers do not.

“Different people have different levels of wealth, so it is important not to be too prescriptive about how much managers invest in their trusts”, says Alan Brierley, director of the investment companies research team at Canaccord Genuity. For example, if a trust's manager is younger he or she will probably be less wealthy, or if the trust they run is higher-risk, they may not want to put a large proportion of their wealth into such a strategy.

"Boards are slightly different as the level of investment they have in a trust should be linked to what they get paid," adds Mr Brierley. "A number of investment companies now give board members part of their remuneration in shares. So it's not unreasonable for a board member to have at least one year's remuneration invested in the trust."

Investment companies where all board members have current shareholding equivalent to more than two years' fees

Bluefield Solar Income Fund
EP Global Opportunities
Fundsmith Emerging Equities
Independent Investment Trust
Jupiter European Opportunities
Majedie Investments
Mid Wynd International
Miton UK Microcap
Personal Assets
Seneca Global Income & Growth
Utilico Emerging Markets
Warehouse REIT

Source: Canaccord Genuity as at 20/04/18

Investors also need to be mindful of board members and managers having too much invested in a trust.

"If management has more than 25 per cent of the shares in a trust it could make a blocking vote to maintain the status quo, which might not be what the investors want," says Mick Gilligan, head of fund research at Killik & Co. "We think it's good [for managements] to have a meaningful amount that's significant relative to their net worth or annual remuneration, but that is not so big that they could block any type of activities that are in the best interest of shareholders."

 

Director dealings

It can also be useful to look at board director dealings. But it is important to remember that a board member may be selling out of a trust’s shares for personal reasons, such as needing the money for an unexpected expense, rather than as a judgement on the outlook for the trust.

Mr Gilligan says: "What is very common to see is a few board members buying shares at a token amount [for example, worth about £10,000] when the trust is under pressure and that is not something I pay much attention to. But I would be more swayed if the managers or board are buying significant amounts."

For example, HICL Infrastructure Company (HICL) traded at a high premium to NAV for many years but recently fell to a discount due to increased political risk surrounding its assets. But between 26 January and 26 March its board of directors purchased 507,091 shares. The trust had about 1.79bn shares in total as of 30 April.

 

Trusts with lots of skin in the game

Some well-known managers back their funds with their own money. Neil Woodford invests his personal wealth in the funds his asset management company runs, although he has not disclosed the specific amount.

Alex Darwall, manager of Jupiter European Opportunities Trust (JEO), owns shares in it with a value of about £24.31m. This trust had a market cap of £829m as of 20 April.

Nick Train, manager of Finsbury Growth & Income Trust (FGT), which had a market cap of £1.26bn as of 20 April, owns 1,209,887 shares in it worth £9.17m. Terry Smith owns 530,000 shares in Fundsmith Emerging Equities Trust (FEET), which have a market value of £6.47m, and the trust has a market cap of about £316m. And Sebastian Lyon, manager of Personal Assets Trust (PNL), which has a market cap of about £869m, owns 11,923 shares in it worth £4.68m.

Several trusts in the Private Equity sector have strong backing from their managers. Apax Global Alpha's (APAX) managers own shares worth £170.7m in the trust. Current employees own 25 per cent of its market cap of about £692m as of 20 April, while past Apax managers own 22 per cent worth £150.2m.

The managers of Electra Private Equity (ELTA) own 11.45m of its shares with a value of £95m. David Zalaznick and Jay Jordan, managers of JZ Capital Partners (JZCP), both own 10,550,294 shares in that trust, with a market value of £52.12m. And the managers of HgCapital Trust (HGT) own 3.7 per cent of its shares, with a market value of £24.82m.

RIT Capital Partners (RCP) is the investment trust in which the directors have the highest personal stakes. This is because the trust was set up to manage the personal wealth of the Rothschild family. The trust's chairman, Lord Rothschild, and his family have an aggregate beneficial holding in the trust of 17,235,463 shares worth £336.78m. The trust has a market cap of about £3bn.

Board member Year appointed to boardAnnual fee (£) Value of investment (£)
Lord Rothschild 19881,365,288See below
John Cornish200854,500161,811
Philippe Costelelos201736,0000
Michael Marks200448,500195,400
Mike Power201442,00013,502
Hannah Rothschild201330,000See below
Amy Stirling201542,00040,213
Duke of Wellington201056,000488,500
Total 1,674,288899,426
The aggregate beneficial holding of Lord Rothschild and family is 17,235,463 shares with a current value of £336.78m.
Source: Canaccord Genuity

Canaccord Genuity's report found that a number of trusts in the Association of Investment Companies (AIC) Global sector have substantial personal investment in them by their boards and or managers. For example, Scottish Mortgage Investment Trust's (SMT) managers own around 17.9m shares in the trust with a market value of £82.9m. But this trust is very large, with a market cap of £6.4bn.

Independent Investment Trust's (IIT) board have £104.3m of their own money invested in the trust, which has a market cap of £408m. All four of its directors have an investment in the trust worth greater than their annual fee, with their total level of fees coming to just under £300,000 a year. Douglas McDougall, chairman of Independent Investment Trust, has shares worth more than £60m in the trust, while Max Ward, managing director of the trust, has shares worth £30m. 

The board of Caledonia Investments (CLDN) owns shares in it worth £42.8m – almost 10 times their aggregate annual fees of £4.5m. Hansa Trust's (HAN) five directors also have an investment in the trust greater than their annual fee: they own shares worth £22m in the trust compared to an aggregate annual fee total of £139,000.

Board member Year appointed to boardAnnual fee (£) Value of investment (£)
David Stewart2015150,000109,130
Will Wyatt20051,799,00030,573,038
Stephen King20091,257,000865,613
Jamie Cayzer-Colvin20051,080,00010,031,776
Stuart Bridges201345,500142,281
Charles Cayzer198539,9001,074,466
Guy Davison201842,2000
Charles Gregson200949,90043,148
Shonaid Jemmett-Page201543,80026,800
Total 4,507,30042,866,252

Source: Canaccord Genuity

There are also some examples of high personal investment among smaller companies investment trusts. North Atlantic Smaller Companies' (NAS) board has £108.7m invested in the trust, which has a market cap of £382m, compared with aggregate total fees of £1.7m. Four out of five of its directors invest more than their annual fees into it. And Aberforth Smaller Companies Trust's (ASL) management team own 2,772,630 shares with a market value of £38.4m. The trust has a market cap of £1.26bn.