Stephen Peters was pretty much given free rein to develop his career when he joined Charles Stanley and he grasped the opportunity with both hands.
Originally brought in to lead its investment trust research, he has expanded his remit into open-ended funds and, at just 32, became co-manager of the Matterley International Growth fund and the group’s in-house collective portfolio service last April.
He said that when he joined the firm, his role was to act as the centralised mouthpiece, co-ordinating the group’s investment trust coverage, and act as a conduit for the experience and knowledge that was spread among its investment managers.
Coming from a predominantly institutional background, Peters was attracted to the faster pace of wealth management where investment decisions can be implemented much more quickly. After graduating with a degree in psychology, he started out at John Scott and Partners, moving over to Hewitt Associates (now Aon Hewitt), where he spent four-and-a-half years working in its fund research team from 2002.
‘At Hewitt, you are dealing with huge amounts of money – £100 million or less would go into pooled funds, but more often than not the money would be managed as segregated mandates,’ he said. ‘But the due diligence and approval process was pretty drawn out because you had to convince the trustees and they were liable for it. It could be quite frustrating – you would do a lot of work but then it would take so long to see the results.’
Peters describes the firm as a ‘brilliant learning ground’, but after completing his CFA, he made the switch back to retail.
Perhaps somewhat surprisingly, given the previous lack of a dedicated investment trust analyst at the firm, Charles Stanley holds around half of the £4 billion private client assets that is held in collectives in closed-end funds – a legacy of its stockbroking days. Overall the group runs £15.4 billion.
One of his first tasks on joining the firm was getting to grips with its clients’ existing holdings, getting out and about meeting the underlying managers and looking for new attractive investment opportunities in the sector.
A staunch if pragmatic advocate of investment trusts, he points to the sector’s rich history and the way it can be used to chart imperialism and technological innovation in Victorian times.
For example, British Empire originally funded gold mines in South Africa, Scottish American funded railway expansion stateside, while the founders of Alliance Trust made their initial fortune in the jute industry, with Dundee textiles supplied to both sides of the American Civil War.
‘Investment trusts have a fascinating history and had a 50 or so year headstart on unit trusts,’ he says. ‘The best investment trusts are comparable and generally better than most open-ended funds because of their structure.
‘They also offer diversification benefits, for example, being able to provide income that you cannot get from unit trusts, or by being able to hold more illiquid assets as they are not subject to daily flows.’
So why in many quarters are they perceived to be a dying breed when they can offer these diversification benefits along with other advantages, such as being able to gear into a rising market – and will the retail distribution review (RDR) really broaden their appeal?
This is the $64,000 question facing the sector. Over the past year, several investment trust managers have commissioned some less than convincing surveys of IFAs, which consistently find that plenty ‘expect to increase their exposure’. Actually translating this into solid action has always been the difficulty.
‘The RDR is potentially an interesting situation for investment trusts, but I think it will be a slow burn,’ Peters says. ‘The main reasons IFAs have not bought them are the lack of commission and how they are marketed – they are not sold to them by fund groups’ salespeople.
‘They are nervous about discounts, gearings and their perceived complexity. They do have their nuances, which can catch out novices, but they have a number of very specific strengths that they need to play to. They need to be different and better to have worth.
‘A good example of this is when F&C tried to launch its US trust earlier this year and, while we wanted the sector to grow, we said we couldn’t support it because we didn’t see it being better or different to anything in the open-ended world.
‘I’m not sure that the investment banks have yet grasped that new issues will be compared with open-ended options and need to differentiate themselves. If they don’t, why would we take the liquidity risk and higher upfront costs of buying the trust at launch?’
The marketing issue is a potentially thorny one and an example of where their history can work against them. Although on the one hand it might sound a minor issue, on first glance the casual investor will not immediately see that Scottish Mortgage is a global growth trust nor that Manchester & London is a UK equity vehicle.
There is also the issue of whether the trust itself should pay for marketing or whether this should come out of the coffers of the fund group that manages it.
On top of these are potential liquidity constraints, which require a combination of skill, experience and having the right contacts when trying to place large deals – something wealth managers new to investment trusts are unlikely to have.
‘They can be very illiquid, but although the screen may say you can buy 5,000 shares, the right dealer can find you 500,000,’ Peters says. ‘You need good people who know the sector and we have dealers who have been working in the sector for decades.’
As a house, Charles Stanley is ‘structure agnostic’, he says, and this is borne out by its rough 50/50 split between closed and open-ended exposure. Where the same investment manager runs both an investment trust and an open-ended investment companies or unit trust, Peters says this can throw up interesting opportunities to trade between the two.
On the whole, though, discount strategies are only played at the margins, with the group tending to favour a buy and hold approach.
‘I believe that for the vast majority of investment trusts, the discount is the last thing you should look at in the decision-making process,’ he says. ‘If you look at Templeton Emerging Markets, back in March 2009 it was trading on a mid-teen discount, which didn’t look attractive, but over the next 18 months it pretty much tripled.
‘Similarly, RIT Capital tends to trade on a slight premium because of its structure and reputation, but its long-term track record is spectacular.
‘If you can buy a good trust at an attractive discount that is great, but longer-term I do not think it is massively important for long-term individual investors to obsess about the level of discount at which a trust trades.’
When looking at mainstream equity trusts, the key issue is whether the fund manager is good and has an appropriate style and approach.
At the margins, though, extreme discount dislocations can materialise and prove highly lucrative. He points to Electra, which was trading at a valuation barely higher than the cash on its balance sheet at the height of the financial crisis, meaning investors were getting its private equity portfolio almost ‘free’.
Similarly, BH Macro saw its discount widen to 6% last year after a poor 2010, but then the trust bounced back with a strong 21% return in the second half of the year.
‘At the moment, we like a couple of names which are on wide discounts but have roadmaps to being narrowed,’ he says. ‘For example, Tamar European holds a portfolio of European industrial properties and is on a 50% discount. But it is 29.9% owned by Laxey Partners and the managers have now been incentivised to realise cash from selling assets and return it to shareholders.
‘This is far more attractive an opportunity for discount trading than worrying if Alliance Trust is on a 12% or 15% discount.’
He also has a position in Princess Private Equity trust, which he deems a special situation, on a similar basis. It is on a wide discount, but is returning cash to shareholders in the form of dividends, buying back shares and increasing its marketing effort in an attempt to bring its valuation closer to net asset value.
These plays are held in a small way in the International Growth Fund, but in a larger size in the two in-house funds of investment trusts – one growth, one income – that Peters runs. The International Growth fund he co-manages was designed to provide overseas exposure for clients who have typically have portfolios of UK direct equities.
Peters says that Charles Stanley’s private client managers are aided in their fund selections by a preferred list of open and closed-end funds, selected by the five-person research team based in London. They provide regular commentary plus fund and trust updates after meetings with managers as well as video updates on Charles Stanley’s intranet. He also makes regular visits to the group’s different branches to discuss manager selection.
‘I find it really helpful to see them in their office – these people are the actual buyers of the fund,’ he says. ‘It’s a nice place to work. I was given a lot of freedom when I joined – you are judged on what you produce and as long as you add value that is what it is all about.’