Does your investment trust have skin in the game? By Emma Agyemang 03 May 2018 Investors Chronicle Copyright 2018 The Financial Times Ltd. All rights reserved 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. Licenced for RIT Capital Partners plc. © The Financial Times Limited 2018. All Rights Reserved. Please do not cut and paste FT articles and redistribute by email or post to the web if you do not have a copyright licence from Financial Times Ltd. Terms & Conditions: http://www.ft.com/servicestools/help/terms Top 20 directors with a personal investment in excess of £1m Trust Director Value (£) 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 Syncona Thomas 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 Licenced for RIT Capital Partners plc. © The Financial Times Limited 2018. All Rights Reserved. Please do not cut and paste FT articles and redistribute by email or post to the web if you do not have a copyright licence from Financial Times Ltd. Terms & Conditions: http://www.ft.com/servicestools/help/terms 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 Trust Manager Value (£) RIT Capital Lord Rothschild OM GBE and Family 336,781,000 Reade Griffith/Paddy Dear & management Tetragon 185,349,000 team Apax Global Alpha Management Team 170,700,000 JZ Capital Partners David Zalaznick/Jay Jordan 104,237,000 North Atlantic Smaller Christopher Mills 97,149,000 Companies Scottish Mortgage Management team 82,900,000 Riverstone Energy Management 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 Licenced for RIT Capital Partners plc. © The Financial Times Limited 2018. All Rights Reserved. Please do not cut and paste FT articles and redistribute by email or post to the web if you do not have a copyright licence from Financial Times Ltd. Terms & Conditions: http://www.ft.com/servicestools/help/terms 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. Licenced for RIT Capital Partners plc. © The Financial Times Limited 2018. All Rights Reserved. Please do not cut and paste FT articles and redistribute by email or post to the web if you do not have a copyright licence from Financial Times Ltd. Terms & Conditions: http://www.ft.com/servicestools/help/terms 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." Licenced for RIT Capital Partners plc. © The Financial Times Limited 2018. All Rights Reserved. Please do not cut and paste FT articles and redistribute by email or post to the web if you do not have a copyright licence from Financial Times Ltd. Terms & Conditions: http://www.ft.com/servicestools/help/terms 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.