Trust boards flex muscles but could do better, say critics

After an active 2020 for fund manager changes and mergers, we canvass opinions on where investment trust boards can make further progress this year.

Last year, numerous investment trust boards stepped up to the plate with fee cuts, new fund manager appointments, mandate changes and mergers – developments that will no doubt have been welcomed by investors.

So far, it looks like shareholders could be on course to see a repeat this year. Two manager changes have already taken place, with two more in the pipeline. Four trusts are set to be merged away, while five funds are due to be wound up, according to figures from the Association of Investment Companies (AIC).

‘Investment company boards have been proactive in the challenging conditions of the pandemic by addressing performance and liquidity issues, and negotiating lower fees,’ said Annabel Brodie-Smith of the AIC. ‘The pandemic has created very difficult conditions, bringing matters to a head for some companies, but some of these changes had been under review for a while.’

Looking ahead, where can we expect to see further action from boards? And where do investors want to see progress?

Mick Gilligan, head of managed portfolio services at Killik & Co, believes the UK equity income sector is ripe for further consolidation. His comments follow the merger of Perpetual Income & Growth, the serial underperformer previously managed by Mark Barnett, with Murray Income (MUT ) last November, creating a fund with close to £1bn in assets. Gilligan hopes to see more mergers of this kind.

Within the UK Equity Income sector, he highlighted 11 trusts with less than £250m in assets – a level considered too small for some wealth management companies to invest. Funds with assets above this threshold tend to go into the FTSE All-Share, which means they benefit from incremental buying from index trackers.

Below £250m, Gilligan said fees tend to be higher and discounts wider. For example, a typical UK equity income trust with a market value above £250m has an average ongoing charge (using the AIC’s methodology) of 0.62% versus 1.03% for those below, according to data from Morningstar (see table).

UK equity income sector ripe for mergers


Group Market cap
(£m)
Ongoing
charge (%)
Finsbury Growth & Income 1,928 0.64
City of London 1,617 0.36
Edinburgh Investment
Trust
1,009 0.55
Murray Income 957 0.64
Law Debenture 858 0.55
Temple Bar 769 0.49
Merchants Trust 601 0.59
Dunedin Income Growth 433 0.59
Diverse Income Trust 403 1.09
JPMorgan Claverhouse 390 0.72
Lowland 335 0.66
BMO Capital & Income 318 0.58
>£250m average 802 0.62

 

Group Market cap
(£m)
Ongoing
charge (%)
Troy Income & Growth Ord 245 0.89
Schroder Income Growth 205 0.86
Aberdeen Standard Equity Income 159 0.87
Invesco Income Growth 161 0.71
BMO UK High Income Units 105 0.98
BMO UK High Income Ord 78 0.96
Shires Income 75 0.96
JPMorgan Elect Managed Income 73 0.80
Chelverton UK Dividend Trust 41 2.12
BlackRock Income and Growth 40 1.19
BMO UK High Income B Share 28 0.96
<£250m average 110 1.03
Source: Morningstar & Numis. Charges as stated in annual reports

Increasing the size of these trusts could reduce their costs and put them on the radar of more investors. ‘This would improve the rating and reduce the discount. The board could then start to think about issuing more equity to increase the size, reducing the cost further and improving the liquidity,’ Gilligan said.

Another challenge facing the sector is the concentration of strategies with a value bias that largely target FTSE 350 stocks. ‘This looks like strong style overlap, implying insufficient differentiation to justify so many smaller trusts in the sector,’ he added.

John Moore, a divisional director at wealth manager Brewin Dolphin, agreed. ‘You can see City of London (CTY ) is £1.6bn, Finsbury Growth & Income (FGT ) is £1.9bn, Murray Income is close to £1bn and Edinburgh (EDIN ), another former Invesco and Mark Barnett trust now run by James de Uphaugh at Majedie, is £1bn. Aside from those four, the average market value is probably around £400m. That isn’t a problem, but it does beg the question: what next?’ he said.

Scale vs specialisation

This dilemma can be applied to generalist trusts, which Moore says appear to be ‘stuck in the middle’, with funds struggling to explain their USPs.

He suggested the boards of these trusts should consider one of two routes. Firstly, going for scale, perhaps via a merger, fundraising or marketing efforts. The second option is to take a more specialist approach, even if this means running a smaller portfolio.

This was the decision taken by the board of former UK equity trust Keystone, which sacked Invesco and appointed Baillie Gifford to run a sustainable global equity portfolio and change its name to Keystone Positive Change (KPC ). It has moved into a niche and, as an early mover in this space within the investment trust world, Moore suspects the board may look to build scale if the strategy gains traction over time.

Boards that are under pressure to make changes should consider whether they want to reflect short-term sentiment or to position with longer term investment trends in mind, Moore said. He suggested several boards of generalist global equity trusts worth less than £500m, such as Brunner (BUT ), could face difficult decisions over the coming years. ‘Markets don’t stop; they progress. Nothing can stay the same. You need to stay relevant – and that relevance check is the biggest challenge,’ Moore said.

James Burns, co-head of Smith & Williamson’s managed portfolio service, has been pleased to see boards ‘flexing their muscles more’ in recent years. Nevertheless, he agreed there is scope for more mergers – even if it is akin to turkeys voting for Christmas. He would like to see Asia Dragon (EFM ) and Aberdeen New Dawn (ABD ) come together, particularly as both are managed by Aberdeen Standard Investments.

‘I think the costs [associated with a merger] are pretty minimal and you get a vehicle that is double the size that suddenly appeals,’ he said.

Cutting charges

Last year was an active one for fee reductions. The AIC recorded 32 fee cuts in 2020, albeit a drop compared with 37 the previous year. Burns welcomes the progress that has been made here, but he would like more boards to cull performance fees where they are no longer relevant.

‘There are certain areas where fees are a bit high. I still think that where there are performance fees they could be looked at. I am not against them, I just think they muddy the waters for investment trusts,’ he said. ‘Performance fees are just another layer of confusion, which people don’t like and don’t understand, so why would you persist?’

Meanwhile, Gilligan said there is scope for greater transparency in the disclosure of a trust’s expenses within its financial statements. His team has written to several boards about this issue.

‘Some boards will split out the costs in great detail, which is helpful. Others will have a number of things itemised and then they have “other expenses”, which is quite often a big number and you never know what those expenses are. If the expense category is more than five basis points of net asset value, I think there is a case for splitting that out.’

Communication is key

Moore believes boards could do a better job of communicating their thinking to the broader market. He recognises why some conversations take place in private but says there could be value in airing certain issues, particularly in cases where boards appear to be inactive but in reality it is a different story. He suggested board members could do profile interviews in the media; for example, a chair could articulate their 10-year plan for their trust.

‘That is an untapped area of media,’ Moore said. ‘There is clearly work going on [at board level] and I think sometimes there is a frustration at certain trusts where they perhaps do not get that message out there, whether it is through the broking community, the investment manager, or through their reports and accounts.

‘There is certainly scope for a greater conversation – and that would be helpful.’ 

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