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Trust boards are still failing too often on discount controls say investors
by Simon Elliott on Feb 20, 2012 at 00:01
At our recent investment companies conference, we asked delegates for their views on issues facing the sector. We had over 70 responses, from an audience that included Institutional investors and private client wealth managers.
The first question we asked was whether delegates believed there would be an increase in demand for investment trusts as a result of the retail distribution review (RDR). From the end of this year, IFAs will be compelled to consider a wider suite of investment products including investment trusts that do not pay commission.
Despite this, 36% of respondents believed there would be a marginal or no impact on the demand for investment trusts as a result of the RDR. Only 11% thought the impact would be ‘considerable’.
The clear majority thought the impact would be ‘dependent on individual trusts’. The consensus seemed to be that those ‘big brands, big trusts’, such as Scottish Mortgage or Templeton Emerging Markets , would benefit while it was unclear whether the remainder would experience any impact at all.
Our second question focused on the effectiveness of discount control mechanisms. These mechanisms are designed to reduce discount volatility and have become increasingly prevalent over the past eight years. However, the experience has been mixed. Some funds have managed to fulfil their obligations but most have struggled, with a number retreating on their promises.
Unsurprisingly, only 6% of respondents believed discount control mechanisms had proved effective. The vast majority, 75%, believed they had been effective ‘in some instances’. Some noted that buybacks had not helped Alliance Trust to any great degree, although Personal Assets and Troy Income & Growth had done a great job of showing what could be done.
The level of share ownership among investment trust directors in their own funds has been in the spotlight recently: 38% of the respondents to our survey believed it is always an issue if directors do not own shares in their own trusts.
One commented it was ‘essential’ for directors to have ‘skin in the game’ while a number suggested managers should also own shares; 25% were a more cautious by electing for ‘yes, with a few exceptions’, 34% saw it as a limited issue and 3% did not regard it as an issue at all.
We asked whether the introduction of performance fees could be justified by the alignment of managers’ and shareholders’ interests and 33% of respondents believed that performance fees could not be justified. Around half (52%) were more circumspect, saying performance fees could ‘sometimes’ be justified but should be judged on a case-by-case basis. Only 15% believed performance fees could be justified or usually justified.
Our survey has revealed some strong responses to a number of the issues currently facing the sector. Investment trusts have much to recommend them including strong performance records and low expense ratios. However, the sector’s long-term success will be affected by how successful boards and fund management companies are in addressing investors’ concerns.
Simon Elliott heads investment trust research at Winterfloods
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