The evolution of British Assets Trust

How does the robustness of the closed-ended structure aid success?

Phil Doel, Manager of British Assets since 2011

View the British Assets company profile page

Like many of the venerable investment trusts in the UK, the management and structure of British Assets Trust plc has evolved since its incorporation on 5th January 1898. It has been under the management of Ivory & Sime, and its successor companies, culminating in F&C Asset Management, ever since. In its early years it had significant exposures to US and other global listed equities. That geographic diversification continues to the current day.

As a long standing dividend paying investment trust, the company has had to innovate in response to changes in taxation, where UK law was far more complex and often less amenable to investment companies than today. James Callaghan’s 1965 Finance Act led to the effective imposition of double taxation on company dividends. This prevented most UK companies increasing dividends, in turn making it hard for British Assets Trust to maintain and grow its payments to shareholders. To help alleviate this situation, in 1968 the company was one of the first to issue tax deductible convertible loan notes to both gear shareholders to the anticipated long term rise in stock markets and to create an interest cost tax shield to increase distributable earnings.

The 1973 oil crisis and subsequent falls in global equity markets led to another change in approach. After what the Chairman described as a “calamitous year for investors”, when the company’s net asset value fell by 67%, the company changed its investment policy. Having relied on capital growth, believing income growth would follow, the decision was made to focus thereafter  on growing the company’s distributable earnings to enable shareholders to themselves be paid a growing dividend. This policy of growing the dividend exists to this day.

In the more recent period of the company’s history, there have been major reorganisations of its structure. Prior to 2001, a large percentage of its UK equities had been held indirectly through a holding in Investors Capital Trust; the company had been a significant holder since 1985. This position was disinvested in 2001 and the assets were in-specie transferred into British Assets Trust’s own portfolio, which meant that for the first time in decades the company directly controlled all of its assets, managing them through geographically based sub portfolios. Later that year, the company issued a 30 year secured bond, which still represents the majority of its gearing, locking in what was deemed at the time to be an attractive long term interest rate of 6.25%.

In 2001 the consolidation of the ordinary shares and growth shares which had existed since 1994 took place. This meant the income generated by the portfolio had to be spread across a far wider share count. The dividend was maintained and this was only made possible by the significant revenue reserves that had accrued in the previous decade, but this would have a bearing on how the company was managed in the subsequent years.

As described in the most recent annual report, with the dividend now covered and modestly increasing, and with a strong revenue reserve, the investment management approach of British Assets Trust plc has changed. The number of equity holdings has been significantly reduced and, whilst retaining a majority exposure to the UK, are now run as a single global portfolio with around 60 individual equity investments.

In its 116 year history the environment in which British Assets Trust plc has operated has necessitated change, and no doubt will again in the future. But it is a testimony to both the efforts of the company’s Directors and the robustness and flexibility of the investment trust structure that it looks to the future with confidence.