Last year, Alan Brierley, director of investment company research at stockbroker Cannacord Genuity, issued a report called Skin in the Game, revealing which board members and managers had big, small or no personal holdings in their trusts.
At the time, this shook up the industry, revealing that some board directors had been cheerily taking their directors' fees without ever committing personal capital to their trust, but it also showed that there were trusts where managers and board directors had real "skin in the game" and were really feeling the pain, or gain, alongside their investors.
The study was perhaps easier to compile for the closed-end sector than it might have been for the open-ended sector. Investment trusts are a lot more transparent in this regard than open-ended funds: under company rules, all directors have to reveal their holdings, and anyone who holds a stake of 3% or more also has to show their hand. In practice, this means many of the managers also have to reveal their stakes.
Looking to board members first, the study revealed there are some chunky weightings. Unsurprisingly, this was at its highest in family-based trusts. Few can top Lord Rothschild's £222.8 million investment in the RIT Capital Partners trust, but Brian Sheppard and family also have a large stake in the Manchester & London investment trust, as does John Duffield in the New Star trust and William Wyatt in Caledonia.
However, this is not necessarily useful for investors. There are potential drawbacks to investing alongside significant family interests. Trusts may not be run in the interests of minority shareholders, for example. They may be run with a wealth-preservation rather than a wealth-creation mandate, and this may not suit a private investor's goals.
There are trusts, however, where large director shareholdings are more informative. For example, Jim Le Pelley has a £2.5 million stake in the £30 million UK Select Trust, of which he is chairman. The trust has recently seen significant outperformance after it replaced SWIP with Simon Brazier of Threadneedle as manager.
It is impossible to know whether "skin in the game" makes boards more active in shoring up performance, but it seems intuitively right. Another example might be Personal Assets Trust, where Frank Rushbrook, who owns a large personal stake, sought out top-performing manager Sebastian Lyon of Troy Asset Management, when the previous manager died in 2008.
The more innovative global growth trusts of recent years have tended to have directors with large shareholdings - for example, Harry Henderson at Witan, which has adopted a multi-manager strategy, and Douglas McDougall at Monks.
However, it is not a panacea. Colin McLean was a large shareholder in SVM Global, which was managed by his company SVM Asset Management. After a run of poor performance and some valuation irregularities, the board took the decision to hand the trust to Henderson Global Investors.
Trust managers in contrast are not generally required to reveal their holdings, but in practice many do, either because their weighting exceeds 3% or because they are also board directors so must show their hand. Some consider it poor corporate governance to manage the fund and sit on the board, suggesting it compromises the integrity of the board. However, it is still reasonably common practice.
Here, the two most notable shareholdings are for Peter Spiller, who owns nearly £10 million of the £90 million Capital Gearing Trust and is both manager and director of the trust, and Alexander Darwall, director and manager of the Jupiter European Opportunities trust with a £9 million stake. Whatever their level of personal wealth, they are certainly sampling their own cooking. It may be a coincidence, but both funds have been extraordinary performers. Darwall's trust is up 93.41% over five years against a decline in its MSCI AC Europe benchmark of 8.06%. The Capital Gearing trust has risen 73.55% over the same period, against a rise of 35.51% in the FTSE All-Share, and with significantly reduced volatility.
Katherine Garrett-Cox, who serves as both manager and chief executive of Alliance Trust, has a large personal stake in the trust, and has presided over some turnaround in its performance. The net asset value (NAV) of the trust over three years still lags the benchmark by around 5%, but the buyback policy has narrowed the discount on the trust and led to superior share price performance.
While managers are not obliged to reveal shareholdings, some are happy to do so. With many of the smaller trusts, large manager stakes are a given. For example, Nick Train owns a £430,000 stake in Finsbury Growth & Income trust. The partners of Aberforth own 3.4 million shares (currently worth £29 million) in the group's flagship £809 million Aberforth Smaller Companies trust. For a number of trusts it may not only be the manager of that trust who holds a stake. For example, Artemis managers Mark Tyndall and Adrian Pattison both hold significant stakes (4% and 3% respectively) in the £128.5 million Artemis Alpha Trust that is run by their colleague John Dodd, although Dodd's stake remains the largest at 5%.
Again, though, this is not a panacea. One of the largest manager holdings is Anthony Bolton's in Fidelity China Special Situations. In this case, the manager's undoubted commitment has done little to deliver notably strong performance.
That said, most investment trust analysts agree that, in general, it is desirable for managers and board members to have some personal interest in the performance of their trust. James Budden, marketing director at Baillie Gifford, says: "All our managers invest in their respective trusts, with some owning seven-figure holdings in their own funds. Gerald Smith, for example, recently backed his own judgement by investing another £1 million into the Monks Investment Trust. All this obviously aligns interests with those of shareholders. The sector is generally good at this, with many long serving managers having large stakes - Ruffer, RIT and similar. I believe it would probably come out better than the open-ended sector."
JPMorgan Asset Management follows a similar policy. James Saunders-Watson, head of marketing and sales for investment trusts, says all of the managers have to take a proportion of their bonuses in the funds they manage. Anecdotally, a number of groups reported that where fund managers have the choice between open and closed-ended funds, they tend to choose the closed-end fund.
Peters says he likes to see fund managers own the shares, while recognising that there are occasionally reasons why that would not be the case. He would like to see more disclosure on fund managers' stakes in their trusts, even if this does not go as far as disclosing the actual monetary amount. He would also like to see boards paid in shares. He adds that for the new Polar Capital Financials trust, half of directors' pay is in shares, "so their monetary interests are aligned with those of investors".
A criticism in the open-ended sector has been that if a manager holds too much of a fund, it is in danger of "lifestyling" - moving to less risky assets as they age. With investment trusts, the board should stop this happening and prevent "mandate creep". However, investors should also ensure that managers are sticking to the objectives of the trust, which should be clearly stated.
What of those trusts where the board members and managers hold low or no stakes? Is it necessarily a recipe for poor performance? Peters points out that a low stake may not be by choice: some companies say they do not allow their staff to buy the listed fund - Brevan Howard, for example - in case they are in possession of insider information. Annabel Brodie-Smith, head of communications at the Association of Investment Companies, says some managers believe their livelihood already depends on the performance of the trust without committing capital to it. There is always the possibility that managers don't have the capital to commit - it seems unlikely, but for reasons of perhaps divorce or school fees, not every fund manager has lots of spare cash.
Board members do not have the same excuses. Brierley's report showed that the personal investment of a third of chairmen is less than their annual fee. Nineteen chairmen have no investment in their respective companies. Equally, nineteen directors who have served for more than 10 years have no beneficial investment in their company.
The report also highlighted those investment companies where the value of the combined shareholdings of the board is less than the annual remuneration. These tended to be at the more specialist end, so the board may argue they are too risky for their personal situation, but the notable laggards in this respect were JPMorgan Chinese, Henderson European Focus and BlackRock New Energy.
Large manager or board-member holdings do not guarantee a fund will perform, but when neither the manager nor the board are willing to commit their own cash to a trust, it should raise eyebrows.