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Edinburgh Investment Trust - the advantages of an investment trust board

17 October 2013

A view from David Prosser, former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine.

There is an important lesson to take from the panic over the announcement this week that star fund manager Neil Woodford is to leave Invesco Perpetual next April. It is that the structure and governance of an investment trust are valuable attributes.

The point to grasp here is that investment trusts are independent companies, run by boards of directors who have statutory duties to shareholders, including the responsibility for hiring and firing fund managers. By contrast, open-ended funds are investment products launched and controlled by the fund management companies who run them.

Advisers don’t often think much about this distinction, but the Woodford affair is an example of why it matters. Woodford’s departure from Invesco Perpetual has forced the fund manager to make some very quick decisions about who will replace him at the helm of its open-ended funds. But while Invesco also has the contract to manage Edinburgh Investment Trust, and uses Woodford to do so, it is up to the board of the fund how to respond. Not only does it have more time to do so, but it also has more options.

One of those options is for the trust to switch fund management company. Woodford isn’t leaving Invesco for another seven months and Edinburgh Investment Trust is entitled to dispense with Invesco’s services on three months’ notice. In theory, as Iain Scouller, an investment trust analyst at Oriel Securities, points out it could even offer Woodford the chance to carry on at the fund once he arrives at his new fund management venture. “We would expect the board to have such a discussion with Woodford,” says Scouller.

If Woodford isn’t interested, or the board feels such a move isn’t appropriate, Edinburgh Investment Trust might opt to let Invesco go and move to a rival fund management firm with a manager that the directors rate highly. Or it might decide that Mark Barnett, the new head of UK equities at Invesco, is the ideal replacement for Woodford.

All of these scenarios are possibilities. And the trust’s board has proved in the past that it has the independence to make tough decisions on behalf of shareholders. The fund’s name is a reminder that it was once run by Edinburgh Fund Managers – the board took the management contract away after growing disillusionment with its performance, switching to Fidelity Investors. In time, Fidelity lost out to Invesco.

Now, this is not to say Woodford’s departure is not a blow for Edinburgh Investment Trust and its shareholders. Scouller understandably describes it as “disappointing news”. But all investors in collective investment vehicles know that the departure of a top-performing fund manager is a risk of which they must be conscious. The moral here is not that investment trusts do not face such a risk – rather, the point is that they are in a better position than open-ended funds to cope when possibility becomes reality.

There’s one final point for advisers to reflect on. Not surprisingly, this week’s news has knocked the share price at Edinburgh Investment Trust, which has now slipped to a discount to the value of the underlying assets. Those who are confident in the board’s ability to manage the transition may even see that as buying opportunity – a reminder that discounts can sometimes be another advantage of the closed-end fund structure.

What the analysts say this week

Ewan Lovett-Turner, Associate Director, Investment Companies Research, Numis Securities

“It is positive that the manager of JPM Emerging Markets Income has removed the carry forward on the excess performance fee over its cap. It is now easier for investors to understand the maximum performance fee charged in any single year (the performance fee in excess of the cap was accrued and so still impacted the net asset value even though it was not paid.  Furthermore, the net asset value has been enhanced by 0.5 per cent through writing back the existing performance fee accrual.”

Mick Gilligan, head of research, Killik & Co

“Henderson Value Trust was previously called Scottish Value Trust and is primarily invested in funds. The trust suffered a severe write-down of its unquoted holdings under the previous management. The new managers have completed their valuation review of the illiquid elements of the portfolio and are comfortable with underlying valuations.

“The investment objective is unchanged – outperformance of the FTSE World Index – but the new managers aim to achieve this via improved manager selection and portfolio balance. There is a continuation vote in December 2014, which provides an opportunity to vote for wind-up if the turnaround doesn’t come through. Ongoing charges (excluding underlying fund costs) were 0.9 per cent in the year ended 30 September 2012.”


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