When investment trusts change managers, Photo by Chris Lawton on Unsplash

When Investment Trusts Fire Their Managers

Possibly the hardest decision the directors of an investment trust have to make is when to change management firm.

It’s a tricky situation for us mere mortal investors as well.

We don’t have to go through all the legwork of assessing dozens of potential suitors, but we do have to decide whether we are happy with the final decision the directors make.

Sometimes there will be a formal shareholder vote, especially if the trust is changing its investment focus at the same time.

Or we can vote with our feet by selling out and moving our money elsewhere.

There are several different flavours of manager change…

#1 Faithful deputies

The most straightforward is the retirement of the main manager and the promotion of their deputy. A lot of the larger investment trust companies, most notably Baillie Gifford, seem to have this process very much smoothed out.

Frequently, the deputy and main manager will have worked on the trust together for several years and there may even be a period where both of them have been co-managers.

As an investor, you know that a manager change is coming but the timing will probably surprise you.

This type of manager change is probably the easiest to deal with, although if it is a ‘star’ manager departing, say if Nick Train were to leave Finsbury Growth & Income, then you need to take a view on whether the magic fairy dust might disappear.

#2 Managers that strike out on their own

Another trend is the portfolio manager setting up his own investment firm with the directors deciding to follow them out of the door.

European Opportunities is one such example, with Alastair Darwall leaving Jupiter and setting up Devon Equity Management. Polar Capital Technology is another example, albeit way back in 2001, when its managers left Henderson Investors.

These situations are also pretty straightforward, I’d say. The people making the decisions about the portfolio are the same as before.

Of course, there is a danger that the manager becomes much less effective without the backing of his former firm. No prizes for guessing the classic example of this happening.

#3 M&A

Another common theme is one investment management firm taking over or merging with another.

This seems to happen quite a lot because the fund management business enjoys massive economies of scale.

Examples are BMO taking over F&C and Jupiter buying Merian. Going back a bit further, we had Fleming being subsumed into Chase Manhattan and then JPMorgan.

These are a little harder to call. You normally see the promise that nothing will change at the firm being bought. Over time, though, there is likely to be some impact although it may be hard to spot from the outside.

#4 Services no longer required

This last type of manager change has become a lot more common over the last 12-18 months and that’s when the directors decide that the current management firm doesn’t do a good enough job and they decide to take their business elsewhere.

This is unique to investment trusts as with open-ended funds and ETFs it’s the management firm that calls the shots.

We hardly saw any such changes from 2016 to 2019, according to the AIC’s corporate activity tables, but there have been numerous examples since:

  • Temple Bar left Ninety One (formerly Investec) for RWC;
  • Edinburgh Investment left Invesco for Majedie;
  • Witan Pacific left Witan for Baillie Gifford, renaming itself Baillie Gifford China Growth;
  • Keystone left Invesco for Baillie Gifford, renaming itself Keystone Positive Change;
  • European Investment left Edinburgh Partners for Baillie Gifford, renaming itself Baillie Gifford European Growth;
  • Securities Trust Of Scotland left Martin Currie for Troy;
  • Woodford Patient Capital went to Schroders, weirdly renaming itself Schroder UK Public Private; and
  • Jupiter US Smaller Companies has just changed to Brown Advisory today and will rename itself Brown Advisory US Smaller Companies.

I’m sure there are a few others I have forgotten about, especially among the alternative asset trusts I tend to follow less closely.

And you could include Perpetual Income & Growth in there as well — it fired Invesco by deciding to merge with Murray Income.

Baillie Gifford has been involved in a lot of these changes and that particular impetus may take a back seat for a while now growth stocks have become less popular.

Another theme was the directors of value-orientated trusts losing patience after a prolonged period of underperformance. That might be abating as well, for exactly the same reason.

What should investors do?

When one of your investment trusts makes a change like this it can be a little jarring, especially when it also shifts its investing style or regional focus.

However, such events nearly always follow a period of underperformance and it’s not uncommon to see the discount shrink when the news is first announced, sometimes quite significantly.

This can provide an opportunity to get out if the manager change is not to your liking. Tender offers, where a trust buys back a large chunk of shares close to net asset value, provide another potential exit route.

In many cases, the new managers are an unknown quantity. For example, I don’t think RWC and Brown Advisory are that well known in UK private investor circles and Majedie only ran one eponymous investment trust.

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The new managers might have more of a track record with open-ended funds, which can give you some insight into their talents, but getting detailed history for these funds is often problematic.

A wait-and-see approach might be needed, so you can review the revised portfolio and see what sort of comments the new managers make.

What happens behind the scenes?

The ability to appoint new managers plays a vital role in keeping the investment trust sector both vibrant and relevant.

Even if manager changes are fairly rare, the fact that they can occur helps ensure that it’s survival of the fittest.

There was a recent AIC webinar on this topic which I geeked out on. Three chairpeople were interviewed about how they approached the process, how it went, and what they learned.

They were:

  • Susan Platts-Martin (Baillie Gifford China Growth – BGCG)
  • Glen Suarez (Edinburgh Investment – EDIN)
  • Arthur Copple (Temple Bar – TMPL)

All of these trusts have rich histories.

Edinburgh has been around since 1889 and BG China Growth since 1907.

The latter has changed name several times and has been known as General Investors And Trustees, F&C Pacific, and Witan Pacific. I owned it for a few years in the F&C days and my wife held Edinburgh for a while.

Temple Bar has been with us since 1926 and was known as Telephone And General Trust up until 1977. This management firm change was apparently the first in its entire history.

Edinburgh and Temple Bar have been focused on the UK for as far back as I could find accounts (the early 1980s).

BG China Growth was reconstituted as a Pacific Basin trust in 1984 after merging with another investment company.

What drives a manager change?

Although prolonged underperformance was the main factor in all three cases, the final triggers differed somewhat.

With Temple Bar, manager Alastair Mundy was forced to retire due to ill health and then it became apparent that Ninety One’s running of the trust had been very dependent on him.

At Edinburgh, Fidelity was replaced by Invesco in 2008 with Neil Woodford running the trust up until 2014. Mark Barnett then took over, as he did with most of Woodford’s other funds.

But while most value trusts struggled in the late 2010s, Barnett did particularly poorly and Edinburgh’s directors decided a change was needed.

As Suarez, Edinburgh’s Chair, puts it, “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.”

With Witan Pacific, as it was known, not only was underperformance an issue but it was the sole trust in the Asia Pacific including Japan sector.

It seems most investors wanted purer exposure to the faster-growing parts of Asia, with the open-ended sector equivalent of Asia Pacific including Japan proving unpopular with investors as well — there are 101 funds excluding Japan but just 8 including Japan according to Trustnet.

Witan Pacific was also using a multi-manager approach, with mixed results at best. With a third of its assets in Japan, narrowing its focus was presumably one option considered, but it decided on something more radical.

The trust had set a two-year period for performance to improve but decided halfway through that the result was a foregone conclusion. Its directors didn’t want to held hostage if multiple activist investors invaded its shareholder register.

A (very) time-consuming process

It’s worth noting that most investment trust directors are independent of the management company and they only serve on the board for several years at most.

So, they are usually temporary guardians of a trust rather than lifers.

What’s more, some trusts have very strong identities whereas others are more fluid in their loyalties.

One common theme from the webinar was the massive amount of time all the directors had to dedicate to the process. A lot of this stems from the many legal hoops that have to be jumped through.

The AIC reckons the typical investment trust director spends around 15 to 20 days a year on a trust. Many directors serve on a number of boards, with five posts considered the maximum that is sensible to have at the same time.

But the directors of these trusts found that changing management firms was a full-time role and caused quite a few sleepless nights as well.

External consultants were used to provide initial strategy reviews on whether a style change was appropriate and then to whittle down dozens of prospects into a shortlist for detailed review.

So the net was cast as wide as possible rather than headhunting a particular fund manager.

Where the management firm also undertook a lot of the admin roles needed to run a trust, additional arrangements needed to be made to switch these over as well.

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What’s more, many of these manager changes took place during the pandemic, so in-person meetings were difficult if not impossible, adding another layer of complexity.

In fact, having watched this webinar, you feel that other trust directors might be put off management firm changes entirely!

There’s no real guidebook or manual to follow and interestingly only one director across all three boards had worked on a manager change before.

Sounding out big investors

One other interesting fact was that the directors were limited as to what they could tell shareholders while the selection process was taking place.

Wealth management firms were sounded out about the broad idea of a management firm change and how investors perceived the trust.

But if they were told that firm X was to be appointed this would make them insiders and therefore unable to deal in the shares until the information become public knowledge.

Few wealth managers or other large shareholders wanted to be in that position.

This means the directors were making the appointment decision very much in the dark, crossing all their fingers and toes while they waited to see how their choice would be received.

Did these manager changes work?

It’s early days in all three cases, but the share price performance has certainly improved and discounts have either narrowed or become premiums.

With Temple Bar and Edinburgh, you could argue the timing was particularly fortuitous and the previous managers would have seen a similar resurgence had their services been retained.

While Temple Bar decided value was still the way to go, as its shareholders apparently valued it as “a counterbalance to the likes of Scottish Mortgage and Lindsell Train”, Edinburgh opted for Majedie’s more flexible approach.

BG China Growth has seen its share price fall back in recent weeks but, such was the demand for its shares immediately following the change, the board’s existing authority to issue new ones ran out and had to be renewed.

The three Chairs all said the overwhelming majority of feedback they received was positive, both in terms of the final decision and the manner in which it was taken.

Dividend drops for all three trusts

One casualty of the manager changes has been the dividends paid out by these trusts, aligning them with the income characteristics of their new portfolios.

Temple Bar and Edinburgh have already decreased theirs and BG China Growth is likely to reduce its payout after it has used up its revenue reserves in the next couple of years.

Prior to the manager changes, Temple Bar had a 36-year record of increasing dividends while Edinburgh and Witan Pacific had 14 years.

In summary

If you’re interested in more on this topic, the AIC has produced a 20-minute video summarising the webinar’s main points.

You can almost see the directors wince at times as they recalled how events unfolded. I certainly have a new-found appreciation of the role that these individuals play.

As Annabel Brodie-Smith of the AIC says, “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.”

Admittedly, I’ve tended to focus on the number of shares directors hold in the trust on this blog but you could argue the length of service and the mix of experience across the board is more important.

The number of shares is easy to quantify of course whereas the other factors are a lot squidgier and more subjective.

Certainly, as was pointed out by many people at the time, the lack of independence in the previous board of Woodford Patient Capital played a significant part in its struggles.

The nature of investment trust directors is not to chop and change management firms on a regular basis. Indeed, one of the Chairs said that “the presumption is not to change”.

And in the case of self-managed trusts, realistically, you’re never going to get a management firm change.

So, I think the onus is primarily on us as shareholders to move on when we’re unhappy.

But the fact that trusts can change management firms should ensure that we’re choosing from a list that’s both limited in size and of mostly high quality.


Disclaimer

Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

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