Not all trusts are run by very large investment companies, as we explain in this article

Investment trusts can often be tricky vehicles to understand because they have extra features over open-ended funds such as unit trusts and Oeics.

Being listed on the stock market means investors buy shares rather than units and these shares may fall to a discount to net asset value when they are out of favour or move to a premium when they are popular. That means investors sometimes pay more or less more than their intrinsic value. Trusts also have the ability to take on debt, known as gearing, which can add an extra layer of risk.

Another important feature to check when investing in a trust is how it is managed. This doesn’t just mean simply finding out which fund manager is at the helm and what his or her track record is, but also the set-up of the vehicle. An investment trust may be run by an investment giant such as Baillie Gifford or M&G or it may be what is known as self-managed.

Annabel Brodie-Smith, communications director at the Association of Investment Companies, explains: ‘We define self-managed as an investment company whose assets are managed by its own team of managers or by the directors of the company, rather than by external fund managers.’

EXAMPLES OF SELF-MANAGED TRUSTS

Well-known examples of self-managed trusts include the £8bn infrastructure investment trust 3i (III), the £2.1bn multi-manager trust Witan (WTAN), and the £800m Scottish Investment Trust (SCIN), which invests in global equities. Clearly, self-managed trusts are just as varied in size and strategy as any other type of fund.

There are also a number of ways in which they operate. Personal Assets Trust (PNL), a £900m investment company which invests in a mix of government bonds and global equities, has its board take all major investment decisions collectively while the day-to-day portfolio management is carried about by an investment adviser, Sebastian Lyon of Troy Asset Management.

At Witan, meanwhile, the board runs the investment company and Witan Investment Services – whose chief executive Andrew Bell is also on the board – takes responsibility for the portfolio and risk management. Brodie-Smith adds: ‘Witan Investment Services delegates the majority of the management to external fund managers in a multi-manager structure.’

Caledonia Investments (CLDN), a £1.9bn global investment trust, has an in-house management team who look for investments with long-term growth characteristics and those which can increase their income.

It says being self-managed means it can focus on the long-term. A spokesman comments: ‘In particular, [we can focus on] dividends for our shareholders without the inherent conflict of trying to manage more capital to increase fees.’

The trust is classified by the AIC as a dividend hero, namely a product where the dividend has been increased every year for more than 20 years. In Caledonia’s case, it has raised its payout for 51 consecutive years.


OTHER EXAMPLES OF SELF-MANAGED TRUSTS

INDEPENDENT INVESTMENT TRUST

This invests in UK equities across a range of sectors and with a bias towards mid to small cap stocks, although there are some large stocks as well.

Holdings, as of 31 August, included technology group Blue Prism (PRSM:AIM) and holiday seller On The Beach (OTB).

PICTON PROPERTY INCOME

 The investment trust invests in commercial property across the UK. Its assets include industrial, office and retail/leisure sites.


WHAT ARE THE BENEFITS TO FUND MANAGERS?

Alasdair McKinnon, manager of the Scottish Investment Trust, says being self-managed may make it easier for him to be a contrarian investor.

This style of investing naturally falls in and out of favour and being self-managed may mean there is less pressure to change style in leaner years.

McKinnon says: ‘[Being self-managed] allows us to take a long-term approach. We get everyone on the board into that mentality from the outset and are clear about what we are going to do and that it is different to other funds.’

Brodie-Smith says other benefits of the self-managed approach is that these trusts have their own employees dedicated to the running of the vehicle, rather than being spread across a number of different funds. Not only does that mean they are fully focused on a single vehicle but it means they are highly motivated to make it a success.

Thomas McMahon, senior analyst at research group Kepler, says: ‘When a management company runs different open or closed-end funds it may have to balance the interests of different portfolios or may not be able to allocate a proportion of an investment to each fund. A self-managed trust has no such issue as it only has one client.’

WHAT DOES IT MEAN FOR INVESTORS?

McMahon believes the interests of a manager and the shareholder are better aligned at self-managed trusts because ‘there is no question of an investment decision being influenced by what is better for a management company which may be investing in the same or similar assets elsewhere’.

There may also be cost advantages, he points out, as self-managed trusts will have relatively fixed fees because the manager’s compensation is determined by a remuneration committee rather than linked to assets or performance.

But there are downsides to these trusts, too. Trusts run by investment giants have access to huge resources – research, analysts and teams of experts, where a self-managed trust may be more limited.

Large asset management firms also have greater resource for marketing, which may mean fewer people are aware of self-managed trusts and therefore they have fewer assets or may be more likely to trade at a discount.

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