Doing it themselves

The number of self-managed trusts, whose assets are managed by its own team of managers or by the directors of the company rather than by external fund managers, appears to be in terminal decline.

Scottish Investment Trust is the latest one poised to change its approach. Its board has recommended a merger with JPMorgan Global Growth & Income, which will be put to a shareholder vote on 9 December.

If that plan is given the green light, the number of self-managed trusts will drop to 12, although this could rapidly jump back up to 13 as EP Global Opportunities is seeking shareholder approval to adopt the model.

Commentators, however, believe that the move by EP Global Opportunities is an outlier, and that self-managed trusts will not be making any sort of comeback. As Peter Walls, manager of Unicorn Mastertrust, points out: “You’re not going to see a great deal more of the self-managed model. In today’s competitive climate the clamour is for investment trusts to be bigger and have scale, and be marketed in a more focused way to capture self-directed retail investors.”

With the number of self-directed investors on the rise, self-managed trusts face an uphill struggle against third-party investment giants in the competition to win over new investors. Against that, as Simon Elliott, head of research at Winterflood Securities, notes: “The main benefit of being self-managed is that the fund manager is very focused on running money and delivering the best possible returns, rather than asset-gathering. For the self-managed model, asset-gathering is a secondary consideration.”

Therefore, having scale is vitally important for self-managed trusts, adds Walls. With a small-sized trust with assets of less than £100 million, the danger is that a prolonged period of underperformance could shrink the assets to a point where it is no longer economically viable to continue running.

This is not an issue that will concern the few self-managed giants with assets of over £1 billion: Caledonia, RIT Capital Partners and Witan. Such trusts, Walls says, can let their performance do the talking by “focusing their efforts on growing the net asset value (NAV) return on an ongoing basis”. 

Elliott argues that Scottish Investment Trust is proof the self-managed trusts that find themselves in the middle ground, with assets of a couple of hundred million, can also compete with the deeper pockets of larger asset management firms. “You can be nimble and have a good profile – Scottish Investment Trust proved that by presenting the trust as the ugly duckling of the sector,” he observes. However, while it got across its contrarian investment approach loud and clear, the reality was that a long period of underperformance pushed the board into action.

There are other potential benefits to the self-managed model. One is that fund managers of self-managed trusts may have greater freedom to invest. In contrast, in larger management groups there can be pressure to toe a corporate line. 

In addition, under the self-managed model it is usually the only portfolio the fund manager is responsible for, meaning shareholder money is getting 100% of the fund manager’s time. In contrast, external fund managers could be more stretched if they are also overseeing other open-ended funds or trusts.

Against those potential benefits, though, there are potential drawbacks with the self-managed model, arguably the main one being that the best fund manager for the job may not be one that works internally for the investment company.

James Carthew, head of research at QuotedData, comments: “The perceived problem with the approach is that it’s rare that a trust can afford to hire the best managers.” Some self-managed trusts acknowledge this by outsourcing parts of the portfolio to external managers: Witan is a case in point.

Succession planning can also prove problematic, with Walls pointing out that self-managed trusts “limit the pool of potential successors by only looking internally”. 

In addition, the boards of self-managed trusts, which tend to be composed of a majority of independent non-executive directors alongside non-independent executive directors, may be more hesitant in bringing down the curtain on the self-managed model if it is failing. “Jobs and livelihoods do undoubtedly make it a more difficult decision for a board,” says Elliott.

Nonetheless, the proposed changes by the board of Scottish Investment Trust, as well as Alliance Trust’s sacking of its own internal managers a few years earlier, show that some boards are not shying away from making tough decisions when self-managed performance is not up to scratch.