Does Your Investment Trust Have Skin in the Game?

Does your investment trust have skin in the game?

By Emma Agyemang 03 May 2018

Investors Chronicle

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.

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

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

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.

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."

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. "We think it's good [for managements] to have a meaningful amount

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 that's significant relative to their net worth or annual remuneration, but that is not so big that they could block any type of activities that are in the best interest of shareholders."

Director dealings

It can also be useful to look at board director dealings. But it is important to remember that a board member may be selling out of a trust’s shares for personal reasons, such as needing the money for an unexpected expense, rather than as a judgement on the outlook for the trust.

Mr Gilligan says: "What is very common to see is a few board members buying shares at a token amount [for example, worth about £10,000] when the trust is under pressure and that is not something I pay much attention to. But I would be more swayed if the managers or board are buying significant amounts."

For example, HICL Infrastructure Company (HICL) traded at a high premium to NAV for many years but recently fell to a discount due to increased political risk surrounding its assets. But between 26 January and 26 March its board of directors purchased 507,091 shares. The trust had about 1.79bn shares in total as of 30 April.

Trusts with lots of skin in the game

Some well‐known managers back their funds with their own money. Neil Woodford invests his personal wealth in the funds his asset management company runs, although he has not disclosed the specific amount.

Alex Darwall, manager of Jupiter European Opportunities Trust(JEO), owns shares in it with a value of about £24.31m. This trust had a market cap of £829m as of 20 April.

Nick Train, manager of Finsbury Growth & Income Trust (FGT), which had a market cap of £1.26bn as of 20 April, owns 1,209,887 shares in it worth £9.17m. Terry Smith owns 530,000 shares in Fundsmith Emerging Equities Trust (FEET), which have a market value of £6.47m, and the trust has a market cap of about £316m. And Sebastian Lyon, manager of Personal Assets Trust (PNL), which has a market cap of about £869m, owns 11,923 shares in it worth £4.68m.

Several trusts in the Private Equity sector have strong backing from their managers. Apax Global Alpha's (APAX) managers own shares worth £170.7m in the trust. Current employees own 25 per

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 cent of its market cap of about £692m as of 20 April, while past Apax managers own 22 per cent worth £150.2m.

The managers of Electra Private Equity (ELTA) own 11.45m of its shares with a value of £95m. David Zalaznick and Jay Jordan, managers of JZ Capital Partners (JZCP), both own 10,550,294 shares in that trust, with a market value of £52.12m. And the managers of HgCapital Trust (HGT) own 3.7 per cent of its shares, with a market value of £24.82m.

RIT Capital Partners (RCP) is the investment trust in which the directors have the highest personal stakes. This is because the trust was set up to manage the personal wealth of the Rothschild family. The trust's chairman, Lord Rothschild, and his family have an aggregate beneficial holding in the trust of 17,235,463 shares worth £336.78m. The trust has a market cap of about £3bn.

Board member Year appointed to board Annual fee (£) Value of investment (£)

Lord Rothschild 1988 1,365,288 See below

John Cornish 2008 54,500 161,811

Philippe Costelelos 2017 36,000 0

Michael Marks 2004 48,500 195,400

Mike Power 2014 42,000 13,502

Hannah Rothschild 2013 30,000 See below

Amy Stirling 2015 42,000 40,213

Duke of Wellington 2010 56,000 488,500

Total 1,674,288 899,426

The aggregate beneficial holding of Lord Rothschild and family is 17,235,463 shares with a current value of £336.78m.

Source: Canaccord Genuity

Canaccord Genuity's report found that a number of trusts in the Association of Investment Companies (AIC) Global sector have substantial personal investment in them by their boards and or managers. For example, Scottish Mortgage Investment Trust's (SMT) managers own around 17.9m shares in the trust with a market value of £82.9m. But this trust is very large, with a market cap of £6.4bn.

Independent Investment Trust's (IIT) board have £104.3m of their own money invested in the trust, which has a market cap of £408m. All four of its directors have an investment in the trust worth greater than their annual fee, with their total level of fees coming to just under £300,000 a year. Douglas McDougall, chairman of Independent Investment Trust, has shares worth more than £60m in the trust, while Max Ward, managing director of the trust, has shares worth £30m.

The board of Caledonia Investments (CLDN) owns shares in it worth £42.8m – almost 10 times their aggregate annual fees of £4.5m. Hansa Trust's(HAN) five directors also have an investment in the trust greater than their annual fee: they own shares worth £22m in the trust compared to an aggregate annual fee total of £139,000.

Board member Year appointed to board Annual fee (£) Value of investment (£)

David Stewart 2015 150,000 109,130

Will Wyatt 2005 1,799,000 30,573,038

Stephen King 2009 1,257,000 865,613

Jamie Cayzer‐Colvin 2005 1,080,000 10,031,776

Stuart Bridges 2013 45,500 142,281

Charles Cayzer 1985 39,900 1,074,466

Guy Davison 2018 42,200 0

Charles Gregson 2009 49,900 43,148

Shonaid Jemmett‐Page 2015 43,800 26,800

Total 4,507,300 42,866,252

Source: Canaccord Genuity

There are also some examples of high personal investment among smaller companies investment trusts. North Atlantic Smaller Companies' (NAS) board has £108.7m invested in the trust, which has a market cap of £382m, compared with aggregate total fees of £1.7m. Four out of five of its directors invest more than their annual fees into it. And Aberforth Smaller Companies Trust's (ASL) management team own 2,772,630 shares with a market value of £38.4m. The trust has a market cap of £1.26bn.

Gender equality

Canaccord Genuity's report also looked at the gender composition of boards. It found that women now account for 22.3 per cent of investment trust directorships compared to 15.2 per cent in 2014 and just 10.2 per cent in 2012. And over the past year the number of all‐male boards has fallen from 82 to 69.

However, about a quarter of the trusts covered in the report still have all male boards. This is despite the UK government setting a voluntary target for companies to have boards which are at least 33 per cent female by 2020.