Have trust hirings and firings resulted in improved performance for shareholders?
A ‘vote of confidence’ by the board is something that is dreaded by football managers, as it more often than not marks the beginning of the end. Unlike the owners of football clubs, though, investment trust boards are not in the business of making contradictory statements; they are much franker when performance is not living up to expectations.
On the whole, investment trust sackings are few and far between, typically amounting to three or four per year. When sackings occur, more often than not a complete change of investment approach also follows. Even when this is not the case and the investment objective broadly remains the same, a high level of turnover is likely as the new management group puts its own stamp on the portfolio.
Sackings are viewed as a last resort, with boards generally placing greater emphasis on the long-term picture rather than obsessing over how results have fared against peers and benchmark over the short term. This is reflected in figures from the Association of Investment Companies (AIC), which show that half of investment trusts, 94 in total, have been managed by the same person for 10 years or more.
Overall, management group changes (including mergers) have been on the rise, although only slightly. Figures from the AIC show there were 24 fund management group changes from the start of 2015 to the end of 2019, up from 21 from the start of 2011 to the end of 2015.
In 2019 there were three notable fund manager changes. The European Investment Trust replaced Edinburgh Partners with Baillie Gifford, Woodford Patient Capital appointed Schroders following the resignation of Neil Woodford, and Invesco’s Mark Barnett was given the boot by the board of Edinburgh Investment Trust in favour of Majedie Asset Management.
See box below for details on how Barnett is feeling the heat elsewhere, along with two other investment trust managers.
Patience wearing thin
While the AIC’s figures represent only a small increase in boardroom activity in recent times, various commentators expect patience to wear thinner and thinner. Patrick Thomas, investment director at Canaccord Genuity, notes: “Over the past couple of years we’ve seen boardroom pressure lead to a number of trusts reducing costs and adopting a tiered fee structure. In addition, there have been some notable management changes of late. Boards are still a bit sleepy, but overall I expect them to be more proactive in light of the Neil Woodford saga, which I think will lead to tougher questions from shareholders in regard to how their money is being invested.”
One driver that may lead to boardrooms becoming even less patient in future years is consolidation in the wealth management industry, notes David Harris of Frostrow Capital, an independent investment companies group. He explains: “Following a series of mergers and acquisitions, four major wealth management groups have now emerged as the dominant players in the UK wealth management market: Rathbones, Brewin Dolphin, Investec Wealth and Investment and Tilney/Smith & Williamson.
“This represents a profound and ongoing challenge for the investment companies sector and raises serious questions for boards. As wealth management groups have grown in asset terms, they require greater central oversight and more liquidity. As a result, investment companies with market capitalisations of less than £250 million are in danger of becoming orphaned by the major wealth management groups on liquidity grounds alone.”
Harris adds that while over the past couple of years there has been an uptick in the number of boards opting to change investment manager in their pursuit of improved investment performance, the reality is that over half of all investment companies sit below the £250 million market capitalisation threshold.
He continues: “The onus is very much on investment company boards to explore ways to ensure they continue to grow and remain relevant. If the pathway to growth is not provided by strong investment performance, it is incumbent on boards to consider their options in the interests of shareholders. These options include changing the investment manager, a merger or winding up the investment company and returning capital to shareholders. Recent examples of willingness to act are encouraging, but there is still a level of inertia across the wider investment companies sector when considering investment manager change.”
Group change no panacea
Changing management group, though, is no panacea for a marked improvement in performance. Indeed, as Moira O’Neill, head of personal finance at interactive investor, notes, in the case of Edinburgh investment trust the board has “never been shy of hiring and firing”. She adds: “In September 2008, the trust moved from Fidelity to Invesco, and the board had form prior to this. It is a classic example of when changing a fund management group does not necessarily improve performance, but it is nevertheless a useful tool of last resort for boards of investment trusts, which open-ended funds do not have.”
Trust delved deeper into the success and failures of a sample of management changes over the past 15 years, to assess whether a change of approach generally pays off. As the table below shows, the results have been mixed for the 10 investment trusts we analysed. But the big positive is that overall, since their respective management group changes, eight of the 10 have outperformed rival trusts in the sector in which they sit.
Most impressive of all is Throgmorton’s strong performance since moving to BlackRock from Framlington. Other trusts that have seen a management change pay off meaningfully include Montanaro European Smaller Companies (LSE:MTE), Pacific Assets (LSE:PAC), Troy Income & Growth (LSE:TIGT), Aberdeen Standard Equity Income (LSE:ASEI) and Witan (LSE:WTAN).
James Carthew, head of investment company research at QuotedData, notes of the findings:
“Montanaro European has been a great success - the manager’s focus on quality has been rewarded. Likewise, for BlackRock Throgmorton, using shorts within the structure has added value and helped differentiate the trust from its peers, though the real success more recently comes from Dan Whitestone’s stockpicking skills. In regard to Witan, the real achievement of the new team has been to reduce the discount and stem what was a constant stream of buybacks.”
Trust sackings: did a change of approach pay off?
|Sacked||Hired and trust name||Month and year new manager took over||SPTR performance since change (%)||SPTR sector average return (%)||SPTR five-year performance vs sector average (%)|
|Henderson Global Investors||Witan (LSE:WTAN)||September 2004||417||379||-15|
|F&C||Witan Pacific (LSE:WPC)||March 2005||271||380||0|
|DWS||Aberdeen Standard Equity (LSE:ASEI)||November 2005||177||140||-13|
|F&C||Montanaro European Smaller Companies (LSE:MTE)||September 2006||300||245||61|
|Framlington||BlackRock Throgmorton Trust (LSE:THRG)||July 2008||515||256||88|
|Fidelity||Edinburgh Investment Trust (LSE:EDIN)||September 2008||157||128||-19|
|Aberdeen||Troy Income & Growth (LSE:TIGT)||August 2009||230||179||25|
|F&C||Pacific Assets (LSE:PAC)||July 2010||191||139||4|
|Allianz Global Investors||BlackRock Income and Growth (LSE:BRIG)||April 2012||94||93||2|
|F&C||Jupiter US Smaller Companies (LSE:JUS)||February 2014||82||98||-23|
Note: Figures rounded up. Data for each trust from the start of the month, when in practice actual management start date will have been at some point during the month and not necessarily the 1st. Data to 12 December 2019. Source: AIC and FE Analytics.
Below par performance
Witan’s more recent performance on a five-year view has been below par, but it is far from alone, with only three of the 10 trusts comfortably outpacing the sector average.
The worst performer on this measure is Jupiter US Smaller Companies. The trust moved with fund manager Robert Siddles when he jumped ship from F&C to Jupiter in February 2014. It is rare for boards to follow the manager from one fund firm to another, although a recent example was (Jupiter) European Opportunities Trust, which retained the service of Alexander Darwall when he left Jupiter to set up his own firm, Devon Equity Management.
Therefore, the figures show that a new manager (just as in football) by no means guarantees success. With the exception of Edinburgh, the trusts in the table have not chopped and changed management groups since their initial move – but there are a number of examples where change has spectacularly failed.
One example that springs to mind is the former British Assets, whose board ditched F&C for BlackRock in February 2015. A change of investment approach was implemented, switching from a global equity income portfolio to a multi-asset approach, and the trust was renamed BlackRock Income Strategies. But just 18 months afterwards, the board called time on BlackRock following an 18% decline in its net asset value over the period. The board switched to Aberdeen and stuck with the multi-asset approach, re-naming the trust Aberdeen Diversified Income & Growth (LSE:ADIG).
Another manager change that did not work out was the UK Select Trust. In July 2012, the board swapped Scottish Widows in favour of Threadneedle following a period of poor performance. But Threadneedle’s Simon Brazier (who now works for Investec) was unable to turn around the trust’s fortunes, and in June 2017 the fund was wound up.
The jury is still out on other more recent management group changes, including Alliance Trust, which switched from a single manager and a socially responsible investment focus to a multi-manager approach. The board sacked Alliance Trust’s internal managers (who now work for Liontrust) and appointed Willis Towers Watson, which has been overseeing the trust since April 2017.
According to QuotedData’s Carthew:
“We liked the ESG approach that Alliance Trust adopted for a while – it made it stand out from the crowd. The Willis Towers Watson idea worked for a while, but not recently. I think it is harder to defend sticking with that idea, if it goes through a sticky patch, than it would have been if that trust was in the vanguard for responsible investing in the sector, as it could have been.”
Results are also mixed for fund management groups that change manager but stick with the same management group, with Edinburgh’s decision to hire Mark Barnett in place of Neil Woodford in January 2014 being one such example.
Carthew notes: “A couple that we know well that have worked out for the best [but don’t involve a change of management house] are the appointment of Dan Whitestone to run BlackRock Throgmorton (March 2015) and Iain Pyle to run Shires Income (May 2018).” Monks is another example: performance has notably turned around since Baillie Gifford’s Global Alpha team, led by Charles Plowden, took over in March 2015.
But, as all the evidence shows, changing management group is certainly no guaranteed panacea, although shareholders will no doubt appreciate efforts from boards to improve performance and broaden their appeal, as opposed to passively taking a back seat.
Under pressure: three managers feeling the heat
Over the past couple of months, it has become apparent that three high-profile fund managers are facing growing boardroom pressure to turn performance around. Here’s the tale of the tape.
Mark Barnett, the protégé of Neil Woodford, has underperformed his peer group in four years out of the past 10, according to FE Trustnet, the data firm. Unfortunately for him and his investors, it has been the last four years in a row. Edinburgh Investment (LSE:EDIN), one of the two closed-ended funds he manages, decided enough was enough on 11 December 2019 and sacked him.
On the same day the board of Perpetual Income & Growth (LSE:PLI), the other trust Barnett manages, put out a statement to shareholders in which it acknowledged that “long-term performance remains poor”, but added that it “does not consider it appropriate to undertake a review of its investment management arrangements at the current time”.
Steve Davies: another ‘value’ fund manager who has underperformed heavily in recent years, Davies has managed the open-ended Jupiter UK Growth fund since the start of 2013 and more recently (April 2016) was appointed lead manager of Jupiter UK Growth. It was previously called Jupiter Primadona Growth trust.
However, the board has grown frustrated, with chairman Tom Bartlam noting in October that a change in manager could be coming: “Our current investment adviser, Steve Davies, will remain in place until such time as alternative portfolio management arrangements have been agreed by the board. The board is working to identify the best outcome ... and will communicate with shareholders as soon as a decision has been made.”
Thomas Moore: perhaps feeling the least heat of this trio is Thomas Moore, who manages the Aberdeen Standard Equity Income trust. He also manages the open-ended ASI UK Income Unconstrained Equity fund. Moore is a respected stockpicker, but performance has come off the boil of late, particularly over the past 18 months. This led chairman Richard
Burns to pen some stern words in the trust’s annual financial report for the year, released late November. Burns acknowledged that Moore’s value style has been out of favour, as he has been favouring domestically focused UK business, primarily in mid and small caps. Burns said: “Our long-term performance numbers, which have for several years been running ahead of our benchmark, are now lagging significantly.”
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