Compass - April 2021
This month in Compass we are talking to the chairs of Edinburgh Investment Trust, Baillie Gifford China Growth Trust and Temple Bar, to find out what happe
By Annabel Brodie-Smith
Spring has arrived and I’m looking forward to Easter – a relaxed holiday at a beautiful time of the year. An Easter egg hunt and roast lamb and everyone is happy!
We are not in at the barn yet – when did builders ever finish on time – but should be in next month. I’m avoiding thinking about the inevitable stress and hassle of moving by embracing Spring and Easter.
Last week I had a very interesting afternoon talking to the chairs of three investment companies who have recently moved to a new management group. It’s well worth watching my webinar with Susan Platts-Martin of Baillie Gifford China Growth Trust, Glen Suarez of Edinburgh Investment Trust and Arthur Copple of Temple Bar Investment Trust. The main thing that comes across is the passion investment company directors have for their role. It’s clear that an independent board of directors is a great benefit for shareholders. They offer additional oversight and have a legal responsibility to protect investors’ interests. As Arthur Copple of Temple Bar explains: “At times the management change process was painful and time consuming for the board to say the least, but I am proud of the result and shareholder feedback has been immensely positive. A highlight has been being able to communicate with shareholders and, hopefully, help them achieve their goals.”
Another benefit of the listed investment company structure is that shareholders can vote, attend AGMs and question the directors there. Our investment expert, Ian Cowie, explores this in his article this month. As Ian explains, “equities can empower every shareholder, big or small” and allow shareholders to express their views on “everything from executive pay to fossil fuels and gender equality”. This is not the case for open-ended funds and ETFs, nor non-fungible tokens (NFTs). No – I have no idea what NFTs are either! You’ll have to read Ian’s article. He also explains how the AIC is encouraging online platforms to do more to empower individual investors with our new Shareholder Engagement Award.
Investment companies’ ability to provide income when times are tough has come into its own over the last year. More than four-fifths (85%) of equity income-paying investment companies increased or maintained their dividends in 2020 despite the impact of the pandemic. This compares with just 23% of equity income open-ended funds. Find out more about this and the dividend hero investment companies here.
In our final article this month, Faith Glasgow, who edited Money Observer which we all miss, looks at whether the size of your investment company really matters. This has been much debated as wealth managers have grown in size and there has been growing pressure on investment companies “to become larger and more liquid”. Scottish Mortgage is the AIC’s largest member investment company with assets of more £17 billion, and there are a host of other big companies over £3 billion. But not all small companies have ambitions to reach this size and Faith explains why for those investing in niche areas “there can be disadvantages in being too large”.
Some important AIC news: our Chief Executive, Ian Sayers, has decided to move on later this year. He’s achieved so much for the industry and although Ian’s not leaving just yet, it’s a good time to recognise his achievements. These included changing company law to allow investment companies to buy back their shares – enabling investment companies to manage their discounts for the first time – and winning a landmark case with JPMorgan Claverhouse Investment Trust plc in the European Court of Justice in June 2007 to remove VAT on management fees.
Personally, it has been a pleasure working with Ian for more than 23 years. He's made the AIC a great place to work and most importantly, we've had many amusing times over the years.
Wishing you a Happy Easter,
Communications Director, AIC
Investment company chairs discuss their recent asset manager changes, exploring the events leading to the change, issues during the process, communication with shareholders and the advantages to shareholders.
Investment company chairs discuss changing managers
Eight investment companies changed asset managers in 2020, including Baillie Gifford China Growth Trust, Edinburgh Investment Trust and Temple Bar Investment Trust. Changing the asset manager gives an investment company an opportunity for a new strategy and a fresh start. But what are the key considerations for investment company boards to ensure the best outcome for shareholders?
Last month the AIC held a media webinar with Susan Platts-Martin, Chair of Baillie Gifford China Growth Trust, Glen Suarez, Chair of Edinburgh Investment Trust and Arthur Copple, Chair of Temple Bar Investment Trust, to explore their investment companies’ manager changes.
Annabel Brodie-Smith, Communications Director of the AIC, said: “Every investment company has an independent board of directors and they are one of investment companies’ most important benefits. Boards offer additional oversight for investors and have a legal responsibility to protect investors’ interests. Importantly, they select the asset manager, monitor performance and can change the manager if performance falls short.
“Investment company boards have been proactive in the challenging conditions of the pandemic. In addition to the eight investment companies which changed their asset manager, last year 32 boards negotiated lower fees for shareholders – around a tenth of the entire investment company universe. Ten companies wound up and returned capital to shareholders and two well-known investment companies merged. These are good examples of boards putting shareholders’ interests first.”
What led to the manager change?
Arthur Copple, Chair of Temple Bar Investment Trust, said: “For a period, performance of the trust had been worrying. Therefore, when Alastair Mundy, the named fund manager, retired the board decided to assess whether the new management arrangements were still in the best interests of shareholders. The first step was to assess whether Temple Bar’s value investing strategy remained the most suitable one for shareholders while simultaneously looking to find out what our shareholders wanted. The board engaged Stanhope, an independent third party, to analyse whether or not value had had its day and if the approach was still suitable for shareholders. Following Stanhope’s independent review and advice, the board decided to stick with the value approach but change the fund manager.”
Susan Platts-Martin, Chair of Baillie Gifford China Growth Trust, said: “Whilst absolute performance was good, performance over one, three and five years had slipped below our benchmark and the share price was persistently below the net asset value. As an actively managed investment vehicle we felt we had to outperform, albeit not necessarily every year, but that if relative performance did not improve within a reasonably short timeframe then action needed to be taken.”
Glen Suarez, Chair of Edinburgh Investment Trust, said: “All boards understand that managers underperform from time to time. The key challenge for a board is to identify what is temporary underperformance, and what is structural underperformance.”
Overcoming the main issues
Glen Suarez, Chair of Edinburgh Investment Trust, said: “When making any decision which will affect shareholders, it is critical for there to be consensus on the board and it is important that you give this time to form. Once there is that consensus, the next step is to get independent advice, which then empowers the board to make the best decisions in the interests of shareholders. When searching for a new manager for Edinburgh Investment Trust, a priority was finding a manager capable of managing a company of this size.”
Susan Platts-Martin, Chair of Baillie Gifford China Growth Trust, said: “Once we had decided on the process, we followed a fairly well trodden path in terms of inviting and reviewing proposals. The main issue was the delay caused by COVID and the eventual realisation we needed to proceed with online meetings and discussions rather than face to face.”
Communicating with shareholders during the change
Glen Suarez, Chair of Edinburgh Investment Trust, said: “Keeping shareholders informed of processes the board go through is critical, as the board’s primary objective is to look after their interests.”
Arthur Copple, Chair of Temple Bar Investment Trust, said: “Communication with shareholders before any announcement is made is very difficult since UK wealth managers are reluctant to be made insiders and communication on sensitive information to shareholders is tough. However, we were able to listen to their views, particularly on style bias. Post the announcement of the management change, the board and managers went to great lengths to speak with all shareholders personally. A virtual roadshow with both me and the managers ensured that shareholders were informed about the investment approach and style of the trust, as well as giving an opportunity for shareholders to question and scrutinise the managers. In order to reach individual investors, we also recorded and hosted a Q&A and videos from the manager and me on our website.”
Susan Platts-Martin, Chair of Baillie Gifford China Growth Trust, said: “We communicated with the assistance of our broker and Baillie Gifford, via calls to larger shareholders and via stock exchange announcements and written circulars sent to registered addresses. Shareholders of course had the chance to vote on the proposals.”
The chairs discuss the advantages for shareholders resulting from their recent management group changes.
Advantages to shareholders
Susan Platts-Martin, Chair of Baillie Gifford China Growth Trust, said: “The share price has risen almost 40% since Baillie Gifford took over on 16 September to the end of February (and the net asset value 21.3%, compared with the benchmark rise of 9%). The trust has been in demand and has traded at a premium and we have been able to regularly issue more shares to grow the trust.”
Arthur Copple, Chair of Temple Bar Investment Trust, said: “Since RWC assumed management of Temple Bar on 31 October 2020, the NAV performance has been terrific. Share price performance has been even better as the discount has narrowed from 7.8% to around 1%. The board believes that the sustainable value style of the new management team will bring long-term outperformance. Since RWC assumed management, there has been a reinforced commitment to marketing the trust which has contributed to the re-rating.”
Glen Suarez, Chair of Edinburgh Investment Trust, said: “Ultimately, the board’s principal concern has been, and continues to be, the interests of the company’s shareholders. The appointment of Majedie was a critical step in ensuring that the company’s objectives of capital appreciation and dividend growth will be met over the long term. Since the change the performance of the company has been much improved and we have every expectation that will continue.”
Most enjoyable part of chairing an investment company
Arthur Copple, Chair of Temple Bar Investment Trust, said: “As Chair of Temple Bar, I have enjoyed having a diverse and immensely supportive board. At times the management change process was painful and time consuming for the board to say the least, but I am proud of the result and shareholder feedback has been immensely positive. A highlight has been being able to communicate with shareholders and, hopefully, help them achieve their goals.”
Susan Platts-Martin, Chair of Baillie Gifford China Growth Trust, said: “I enjoy being able to set the agenda for board discussions and working collegiately with my fellow board directors to reach decisions for the benefit of our shareholders.”
Glen Suarez, Chair of Edinburgh Investment Trust, said: “Throughout Edinburgh’s manager change process, I have thoroughly enjoyed working with my colleagues to advance the interests of the company and ultimately the interests of our shareholders.”
Advice for other investment companies
Arthur Copple, Chair of Temple Bar Investment Trust, said: “Boards looking to consider a management change should prepare for a long slog. However, at the end, after a thorough process and careful deliberation, they will realise it is worth it for shareholders. Don't necessarily take the easy route. Boards should remember that shareholders are key, and they should always keep good lines of communication with them. Listen to what your shareholders want.”
Having your say
Ian Cowie on the power of investment company shareholders
Put your money where your mouth is. That’s a familiar concept to anyone who has put theory into practice financially.
Now rising numbers of investors are making our money matter by using it to express our opinions on everything from the environment to the ethics of various economic activities. Your individual savings account (ISA) or pension plan could be a force for good and a catalyst for change in the world, if that is what you want.
New technology and the ‘democratisation of finance’ is enabling more investors to invert the cliche and ‘put our mouth where our money is’. Old technology, in the form of Parliamentary legislation and property rights, gives shareholders substantial powers to put our views into effect on everything from executive pay to fossil fuels and gender equality. For more than a century, shareholders in investment companies have enjoyed the legal right to vote on how our assets are allocated. We are represented by a board of independent directors who have a legal duty to do their best to protect all shareholders’ interests equally and the power to hire or fire fund managers. We can attend annual general meetings (AGMs) and grill directors on the performance of their duties. At regular intervals, shareholders can vote to elect or sack these directors.
None of those rights is enjoyed by investors in other forms of pooled investment, such as exchange traded funds (ETFs) or open-ended investment companies (OEICs) or unit trusts. That’s a fact that may have seemed somewhat technical in the past but is now seen as important by increasing numbers of ethical investors who want our money to make a difference in the world, perhaps by cutting pollution with cleaner, greener energy; avoiding addictions to gambling or tobacco; or guaranteeing workers more job security and a minimum wage.
Never mind, for a moment, all the fuss about ‘financial flash mobs’ on antisocial media or the modish fascination with alternative assets such as non-fungible tokens (NFTs). Don’t ask. Well, if you insist, I would say NFTs are an unintended consequence of quantitative easing (QE) - or central banks pumping massive liquidity into the global economy - as all that extra money pushes up the price of everything, including digital assets such as art or music.
We might also discuss distributed ledger technology (DLT), which is the idea behind blockchain and the basis for all virtual currencies - including Ethereum, which aims to ensure each NFT is unique and non-exchangeable. Or we could simply dismiss day trading and NFTs as the sort of thing that happens when free money meets free time. Much more important to most medium and long-term investors is the preservation of our capital and its ability to generate growth and income. This is how rising numbers of us buy our homes and pay for children’s education and our own retirement. Digital technology makes it easier than ever for us to achieve those goals because of the unprecedented availability of financial information - news and views - in real time online.
When I began investing in the stock market via investment companies a quarter of a century ago, very little information was truly contemporaneous or ‘live’ because most of it had to be recorded and transmitted on bits of dead trees; better known as paper. This was often difficult to access in brokers’ offices and business libraries. Now masses of data - and the ability to act on it in a timely fashion - is available to all of us via online investment platforms. No wonder these platforms now hold over £200 billion on behalf of more than two million investors. Three of the biggest in Britain - Hargreaves Lansdown, interactive investor (ii) and AJ Bell - recently called on Parliament to do more to ensure individual investors enjoy equal rights alongside institutional investors when companies float on the London Stock Exchange.
The AIC is encouraging these platforms to do more to empower individual investors with its new Shareholder Engagement Award. The idea is to identify the platform that does most to keep investors informed about financial news and to encourage us to attend AGMs and vote.
Here and now, only a minority of shareholders exercise our votes or turn up to meetings. All three of Britain’s biggest investment platforms offer free voting services but each of them told me that few clients express much interest. For example, ii reports that only a quarter of its clients have registered to vote and just 8% of them actually did so last year. Even so, apathy about the allocation of our assets is changing as ethical, environmental and younger investors become more of a force in the market. That process is accelerating as investment companies and investment platforms encourage shareholders to engage with equities and make our views known.
As in other walks of life, folk who don’t vote are effectively demanding to be ignored. Don’t disenfranchise yourself; equities can empower every shareholder, big or small. We can do well by doing good and make our money matter.
How investment companies continued to pay income in 2020
More than four-fifths (85%) of equity income-paying investment companies increased or maintained their dividends in 2020 despite the impact of the pandemic, according to AIC data.
Out of 129 equity investment companies yielding more than 1%, 82 (64%) increased their dividends to shareholders in 2020 with 28 (22%) maintaining the same pay-out as in 2019.
In contrast, out of 700 open-ended funds yielding over 1%, 159 (23%) increased their dividends in 2020 and none held dividends at the same level as 2019.
Investment companies’ income resilience was even stronger in the equity income sectors. In the UK Equity Income sector, 91% of investment companies maintained their dividends in 2020, compared to only 4% of open-ended funds in the same sector.
In the Global Equity Income sector, 100% of investment companies maintained dividends, compared to 24% of open-ended funds.
See the full research
The data demonstrating investment companies’ dividend resilience comes as the AIC unveils an updated list of the 19 “dividend hero” investment companies. These have consistently increased their dividends for at least 20 years in a row.
Six dividend hero investment companies have now increased dividends for 50 or more consecutive years. City of London, Bankers and Alliance Trust lead the way with 54 years of consecutive increases. They are followed by Caledonia Investments (52), BMO Global Smaller Companies (50), and F&C Investment Trust (50).
Resilient income has rarely been more important, with UK dividends falling 41% in 2020 in response to the COVID-19 crisis, and dividends globally 12% lower in 2020 than 2019, according to Janus Henderson’s Global Dividend Index (February 2021).
Annabel Brodie-Smith, Communications Director of the AIC, said: “The fact that so many equity investment companies were able to increase or maintain dividends during such a devastating year highlights the power of investment companies’ income advantages. Many investment companies made use of their revenue reserves, a structural benefit unique to investment companies, which enables them to save up to 15% of the income they receive each year. Investment companies can draw on these reserves to boost pay-outs during difficult times like last year.
“As many investors rely on their investment income to pay for the gas bill or the weekly shop, it’s reassuring to see investment companies are delivering when it really matters. However, it’s important for investors to remember that dividends are never guaranteed. It’s up to an investment company’s board to set a dividend strategy which is in the best interests of their shareholders.”
See a list of the dividend heroes
The next generation of dividend heroes
Waiting in the wings to become dividend heroes, there are now 23 investment companies that have increased their dividends for at least ten, but fewer than 20 years.
These include seven new additions to the ‘next generation’, which have notched up a decade of uninterrupted dividend increases. The new joiners are Chelverton UK Dividend, Invesco Select Trust Global Equity Income, JPMorgan Elect Managed Income, Aberforth Smaller Companies, TR Property, Henderson Opportunities Trust and Fidelity European Trust.
Athelney leads the next generation of dividend heroes having increased its dividend for 18 consecutive years. Completing the top three are BlackRock Smaller Companies (17) and Henderson Smaller Companies (17) with Artemis Alpha Trust (16) and Murray International (16) following close behind.
See the next generation of dividend heroes
Note on the research
Source of all investment company and open-ended fund data is AIC/Morningstar. The finding that 85% of income-paying equity investment companies increased their dividend in 2020 is based on investment companies in equity sectors with a 12-month rolling yield of more than 1% at 31 December 2019. Dividend data compares the total pence per share (or traded currency if different) in the 2020 calendar year with 2019 based on pay dates, and excludes special dividends. Data for open-ended funds is based on the primary share classes of open-ended funds with a 12-month rolling yield of more than 1% at 31 December 2019, and excludes feeder funds.
Small vs mighty
Faith Glasgow explores whether investment company size matters
It seems that big is increasingly beautiful for investment companies (ICs). Over recent years, there has been growing pressure on them to become larger and more liquid, and the most successful companies now have net asset values (NAVs) in the billions of pounds.
Scottish Mortgage, by far the largest, has a NAV of around £17 billion, but Alliance Trust, F&C, Monks, RIT Capital Partners, Polar Capital Technology, Greencoat UK Wind, The Renewables Infrastructure Group, Tritax Big Box and Pershing Square Holdings all have NAVs above £3 billion, and there are around 50 more ICs with NAVs of between £1 and £3 billion.
Why should size be considered advantageous? Most obviously, greater market capitalisation provides greater liquidity, which makes it easier for large wealth managers – where so much IC investment is now concentrated – to deal successfully.
As Priyesh Parmar, associate director at broker Numis, explains: “Trading liquidity is one of the most challenging issues facing the investment companies sector, particularly as wealth managers have consolidated in recent years and make increasing use of centralised buy-lists.”
Andrew McHattie, in his excellent new book Investment Trusts – A Complete Guide, puts it succinctly: “For wealth managers and institutions needing to deal in larger blocks of shares, it can be extremely frustrating if the normal dealing size is too small to accommodate those needs.”
Source: AIC/Morningstar, data end Feb
McHattie points out that in 2010 the minimum size of trust workable for a wealth manager was considered to be £50 million; now it is £200 million. Yet around 45% (by number) of the closed-ended universe of around 400 companies are worth less than £200 million, according to Numis.
Such small investment companies never make it on to the radar of most of the institutional investors, and many are trading on wide discounts as a consequence.
There are further benefits to being big. Large companies can tap into economies of scale as they’re able to spread fixed costs – such the fees for auditors and directors or the printing of the annual report – over a larger asset base. Dealing spreads also tend to be smaller for larger, more liquid and more widely traded companies. Again, smaller, relatively illiquid peers lose out.
The upshot is that big, successful companies tend to get bigger, while those small funds “that are undifferentiated from their peers and limited in scale need a strategy for growth or improvement if they are to survive", according to Numis’s Ewan Lovett-Turner. Some boards have simply wound up in the face of that pressure: AIC data shows 20 companies were closed in 2020.
But not all small investment companies are anxious to grow. For those investing in niche areas with limited investment capacity, such as micro caps, there can be disadvantages in being too large.
The best example of 'deliberate smallness’ among the handful of micro cap ICs is River & Mercantile UK Micro Cap (RMMC), which runs a concentrated portfolio of around 40 companies and has limited its size to £100 million ever since its IPO in 2014.
George Ensor, manager of the company, sets out the rationale behind this approach: “Contrary to both the broader trend for larger trusts and the commercial incentive of running a larger trust, the size of RMMC is limited because we believe it will enable us to deliver higher returns to shareholders.
“We look to invest in a part of the market – companies with a market capitalisation of less than £100 million – which is often overlooked by others. It is challenging for larger funds to gain significant exposure to these micro-cap companies. The constraint on the size of the trust is really a result of the size of the companies we are investing in and the number of holdings we have, as running a larger trust would require a less concentrated portfolio (i.e. more holdings).”
RMMC returns capital to shareholders through a compulsory partial redemption of shares when the trust gets too large; that has happened four times since listing, most recently in January this year. “It is a very cost-effective method, and we have returned approximately £57 million of the £70 million that has been raised since IPO back to shareholders,” adds Ensor.
While RMMC is the only trust to actively cap its growth, Miton UK Microcap, run by Gervais Williams, has an annual redemption option, whereby shareholders can choose to redeem some or all of their shares for cash.
Other trusts with a niche focus may also prefer to limit their size: McHattie reports that “the manager of BlackRock Frontiers (BRFI), which invests in some small, out-of-the-way markets such as Kazakhstan and Kenya, has also spoken of a maximum size for efficient investment”.
Killik’s head of managed portfolio services Mick Gilligan suggests that restrictions on size may also be beneficial to avoid issues of dilution. Possible examples include trusts that hold a very rare and valuable set of assets, where further capital raises risk diluting the quality (possibly venture capital trusts), or those where the running yield is very attractive and fresh capital could not be deployed at similarly attractive yields.
“Tritax Big Box is a possible example of a vehicle where consecutive capital raises in a tight market were invested at progressively lower yields,” Gilligan adds.
There is a further aspect to this whole issue of the attractions of size. As mentioned earlier, small, under-the-radar investment companies may in many cases be trading on hefty discounts -– and one multi-manager IC in particular has successfully focused its attention on sniffing out those offering unrecognised opportunities.
“Miton Global Opportunities (MIGO) has a unique mandate within the sector through its focus on exploiting pricing inefficiencies among closed-ended funds,” says Parmar.
The managers Nick Greenwood and Charlotte Cuthbertson seek funds that have fallen out of favour and trade on wide discounts. “With many smaller trusts falling below the radar of wealth managers, and in particular given the growth of alternative asset classes, there is a lot of scope for mispricings,” they comment.
MIGO has a NAV of only £89 million, but has had an outstanding run, with NAV growth up 61% over one year and more than doubling over five. That suggests there are clearly hidden gems within the lower ranks of the closed-ended universe; it’s just a matter of knowing how to find them.
Ultimately, though, Gilligan believes that in general the pressure to grow is almost irresistible in the closed-ended universe: “I suspect most trusts would like to grow, even those in small cap sectors; I don't think many, if any, illiquid small cap trusts are the size they are out of choice.”