Managers get boot in bid to up performance

Share this

Investors in Henderson Asian Growth Trust must hope that moving its mandate to a different management house will result in a more competitive performance.

HAGT has produced volatile and, on balance, disappointing returns over the past five years, and although manager Andrew Beal was convinced his growth-oriented approach would eventually prove its worth, the board of directors got tired of waiting and held a beauty parade to review the alternatives.

Schroders (SDR) won the contest with plans to implement a different approach to any other trusts in the Asia ex Japan sector. Assuming shareholder approval, the trust will adopt a strategy with an absolute return focus alongside a hedging overlay to reduce risk at both the country and market level, and invest more in medium to smaller companies. It will be managed by two of Schroders' Asian-based managers who have had great success with a similarly focused open-ended fund.

With keen competition to win new trust mandates, boards running a beauty parade can often secure various improvements to their trust's structure. Twenty-six managers put in a bid for the HAGT mandate and, as the winner, Schroders agreed to a simplified fee structure and to defend the trust's discount at 9% through share buybacks.

In addition, there is to be a tender offer for up to half the issued capital at net asset value (NAV) less costs, open only to those who already held the shares on 28 December. The decision to appoint Schroders was greeted with a fall in HAGT's discount to less than 6%, compared to a one-year average of more than 9%. Winterflood Securities suggests that if the new managers live up to expectations the discount will trend on down.

HAGT's switch is a reminder that investment trust boards are an important champion of shareholders' interests, and one that is not replicated in the open-ended world. The boards are independent of the managers, and are responsible for making sure trust mandates remain attractive and relevant, that their fees are fair and reasonable, and that the managers are doing a good job. If not they must demand change, with the ultimate sanctions being a shift of manager or a wind up.

It can take time for boards to take action, as they will be anxious to avoid doing so just as a long-standing strategy is about to come right. It is especially hard to make a change if a trust has a deeply entrenched manager who has done well in the past, as in the case of SVM Global Fund. But with the latter enduring a protracted period of poor performance followed by the sudden resignation of its joint manager, its directors were prodded into action. Having received 33 proposals, they elected to move the mandate to Henderson, which has proven skills in the multi-manager sector. Following shareholder approval at its general meeting on 25 March, the fund's name was changed to Henderson Value Trust (HVTR). The ticker changed to HVTR with effect from 27 March 2013.

It was similarly up to the board of UK Select Trust (UKT) to decide what action to take when Scottish Widows said it wanted to resign as manager. Some experts hoped UKST would be merged into an existing and successful trust, to provide a larger more liquid vehicle. This can work well, as appears to have been the case with the April 2012 merger of Charter European Trust (CPE) into the consistently reliable BlackRock Greater Europe Trust.

On the other hand, as with most investment decisions, it can prove poorly timed, as appears to have been the case with the December 2010 merger of Gartmore Growth Opportunities into Artemis Alpha Trust (ATS). In UKST's case the board decided to retain the trust's independent status and award the mandate to Threadneedle Asset Management, which was eager to get a toe hold in investment trust management.

Off the boil

Simon Brazier, who has taken charge at UKST, has done well over the past three years as manager of Threadneedle UK Fund. However, the latter has been off the boil recently so it is not surprising that the UKST's net asset value per share has marginally lagged the FTSE All-Share index since he took charge at the end of July.

The share price has performed considerably better, as Threadneedle's commitment to keep the share price close to NAV through a very active buyback and reissue policy has virtually eliminated the discount. However, there will be no such boost from discount elimination going forward.

It is unfair to judge new managers over their first year in charge, and it is therefore too early to be critical of BlackRock Income and Growth Trust (BRIG), which changed its name from British Portfolio Trust when the mandate was moved from Allianz Global Investors in April 2012.

As at UKST, its new managers Nick McLeod-Clarke and Adam Avigdori have had an uncharacteristically poor year with their previously successful open-ended fund, and the BlackRock trust's NAV returns have been lacklustre over the past six months. However, the market liked the trust's move from the UK growth to the UK growth & income sector, as well as the promise of improved dividends and BlackRock's commitment to keep the discount below 4% through buybacks. As with HAGT and UKST, therefore, short-term share price gains have been accelerated by a narrowing discount.

Troy Income and Growth Trust (TIGT), The European Investment Trust (EUT) and Pacific Assets Trust (PAC) all moved their mandates several years ago, and by and large they indicate that such moves can work well for patient investors.

TIGT emerged from the remnants of Glasgow Income Trust in April 2009. It moved to the UK growth & income sector but slashed its dividend from its previously inflated level as its new manager, Frances Brooke of Troy Asset Management, aims for a sustainably growing yield from an ungeared portfolio. The adoption of a zero-dividend discount policy has ensured TIGT's shares trade constantly at close to NAV, and Brooke's commitment to a quality blue-chip portfolio worked very well for three years. It has been too defensively positioned for the recent bull run, but the decision to adopt an absolute return policy means it is liable to fall behind in strong markets but will hopefully make up for it in harder times. Those who stayed loyal in 2009 have no cause for complaint.

Investors in The European Investment Trust have had to exercise more patience. They had suffered years of underperformance when the trust was F&C EuroTrust, and they were warned that the value-oriented approach adopted by Dale Robertson of Edinburgh Partners could take time to come right, with good periods interspersed with setbacks. This has proved all too true, with the trust performing better than most in 2011, but then giving up a lot of ground in 2012. However, it has started to do well again recently, as have a number of other value-oriented trusts.

Pacific Assets Trust kept its name when it left the F&C stable in July 2010. It had a rough ride in the mid-noughties, and F&C tried to retain the mandate by poaching Peter Dalgliesh from Gartmore in 2006 specifically to manage it. Having done well in his first year, he suffered badly in the 2007-8 bear market and did not make up for it in the recovery. So the board decided to move to First State's highly regarded Asian and global emerging markets team, now known as First State Stewart.

David Gait, who heads First State's sustainability team, was put in charge, and the portfolio is now focused on companies with policies that should have a positive impact on the inhabitants and environment of the countries where they operate. Gait's approach took time to bed down, but the trust's three-year NAV total returns were above average and above its benchmark at the end of January.

Trusts do not have to move management house in order to change their spots, as the remarkable turnaround at Securities Trust of Scotland (STS) since its August 2011 move to the global income growth sector and the appointment of Alan Porter as manager demonstrates: it is still within the Martin Currie stable.

Similarly the May 2012 transformation of Edinburgh US Tracker Trust into North American Income Trust (NAIT) also has the potential to turn out well, although the mandate has remained with Aberdeen Asset Management. Fidelity must similarly hope that last September's change of style and manager will continue to rejuvenate Fidelity Special Values (FSV), just as a new manager and style have enhanced returns at Fidelity European Values (FEV).

All these changes might have been mooted by the management group, without any prodding from the board, as would happen at an open-ended fund. But the board makes sure the management house has the right personnel for the new mandate, and that shareholder interests are paramount. It is also responsible for demanding further changes if needed. Ideally the directors' personal shareholdings in the trust should be sufficiently large to ensure their ongoing close attention.