The investment trust boards with and without skin in the game

Research from investment trust analyst Investec found 15% of board directors have no personal investment, including 15 chairs. Kyle Caldwell reports.

One of the differences between funds and investment trusts is that the latter typically has an independent board of directors overseeing it and ensuring it is managed according to shareholders’ interests.

In most cases, the directors will appoint an external fund manager to run the trust. If the manager doesn’t do a good job, the board can replace them. Boards can also help drive down fees, which is a trend we’ve seen over the past five years or so, with economies of scale being passed on through lower charges.

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Given the important role of boards, it is interesting for shareholders to know if they are eating the fund manager’s cooking by personally parting with their own cash.

The good news is that investors can find this out because of comprehensive research by investment trust analyst Investec. Its latest report, which has been running for more than a decade, lifts the lid on the ‘skin in the game’ of investment trust board members and for fund managers with very large stakes (holding more than 3% of the shares).

The report notes that over the past decade there’s been a notable increase in skin in the game, reflected in the disclosed aggregate investment by boards and managers increasing from £687 million in 2010 to £4.2 billion at the end of May.

In addition, there’s been big progress on boards improving gender diversity. Of investment company directorships, 41.1% are now held by women, compared to just 8% in 2010.

However, the analysis notes that in respect to skin in the game there’s room for improvement, as 15% of directors had no personal investment higher than 12% in 2014. In addition, 15 chairs (5.1% of those featured) have no investment in their company.

The report features 293 investment companies and 1,445 chairs/directors.

Those with significant stakes

In total, 22 investment companies have boards where all directors have shareholdings valued at more than one year’s fee. Those trusts are: abrdn European Logistics Income (LSE:ASLI), Nippon Active Value (LSE:NAVF), Aquila European Renewables (LSE:AERI), Oakley Capital Investments (LSE:OCI), Ashoka India Equity Investment (LSE:AIE), Pacific Assets (LSE:PAC), BlackRock Income and Growth (LSE:BRIG), Pantheon International (LSE:PIN), Brunner (LSE:BUT), Pantheon Infrastructure (LSE:PINT), CC Japan Income & Growth (LSE:CCJI), Personal Assets (LSE:PNL), Chenavari Toro Income Fund (LSE:TORO), RTW Venture (LSE:RTW), CT Private Equity Trust (LSE:CTPE), Tetragon Financial (LSE:TFG), India Capital Growth (LSE:IGC), UIL (LSE:UTL), Literacy Capital (LSE:BOOK),Warehouse REIT (LSE:WHR), Montanaro European Smaller (LSE:MTE), and Worldwide Healthcare (LSE:WWH). 

The largest investment by a board member or manager is at Pershing Square Holdings (LSE:PSH) where the manager’s shareholding is £1.36 billion, followed by the Rothschild family at RIT Capital Partners (LSE:RCP), which has £549 million invested.

Of trusts in the interactive investor Super 60 or ACE 40 investment ideas lists, the top five largest investments by management teams disclosed in the report are Capital Gearing (LSE:CGT), at £21.3 million, followed by Pacific Assets (LSE:PAC), Scottish Mortgage (LSE:SMT), F&C Investment Trust (LSE:FCIT) and City of London (LSE:CTY), whose fund managers have invested £2.1 million, £1.9 million, £1.7 million and £1.2 million.

Overall, 53 chairs and directors have an investment in excess of £1 million. A higher number of fund managers and management teams – 88 in total – have seven-figure investments.  

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Only investment trust fund managers with very large stakes (holding more than 3% of the shares) are obliged to report their shareholdings. Others go further by disclosing without being required to, but most keep their cards close to their chest.

Alan Brierley, director of investment companies research at Investec, has called on fund managers to tell investors whether they eat their own cooking.

He said: “A significant majority of managers are still unwilling or unable to disclose skin in the game. While there is no regulatory requirement for managers to make such statements, we find this disappointing. For those who do not disclose, if they were to at least acknowledge that they have an unspecified investment, this would be a step in the right direction.”

Those with room for improvement

There’s plenty of room for improvement. The 15 chairs with no investment are highlighted in the table below. However, it should be noted that the latter two were appointed this year.

In addition, 54 chairs who have sat on an investment trust’s board for at least five years currently have a shareholding valued at less than their annual fee.

Chairs with no investment 

Source: Investec Securities analysis.

Does skin in the game matter?

At interactive investor, we think it is important for investors to know if their fund manager is eating their own cooking, which is why we ask every manager we interview whether they personally invest in the fund or investment trust they oversee.

All the fund managers we’ve questioned in our Insider Interview video series have said they do have their own money invested, meaning they share both the good and bad times with investors. 

Context, of course, is important, with a percentage of overall wealth the best measure of how much ‘skin in the game’ is invested. In addition, the fund’s strategy or asset class may not be appropriate for the manager’s own investment goals or risk appetite.

Having skin in the game does not guarantee success. Instead, it aligns an individual's interests with investors, which sends a powerful message to existing shareholders and potential new shareholders.

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Brierley points out that investors should “beware the perils of too much skin in the game” as this can lead to bad outcomes, such as poor shareholder governance.  

But, on the whole, Brierley thinks that having skin in the game is a power for good.

“We firmly believe that personal share ownership by boards and managers sends a clear and powerful message to both existing and potential investors. Arguably, as we continue to navigate choppy waters, with discounts close to levels last seen in the global financial crisis, this alignment of interest is even more important in helping to underpin investor confidence,” he says.