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Magazine Issues » November 2021

Investment trusts roundtable: A new lease of life

Funds Europe – I wanted to come on to talk about a specific feature of investment trusts, which is the boards, because that’s something that you touched on, Thomas, in the very first question. Annabel, can you fill us in and then maybe, Thomas, you can pick up on exactly how that applies to your trust.

Brodie-Smith – There is an independent board of directors. This is an important governance feature of investment companies, with directors who are there to look after the shareholders’ interests. They will monitor performance; they will monitor other arrangements, such as marketing and all sorts of elements of that investment company. They will assist with the manager; in extreme cases, they can even move that company to another management group if they’re truly dissatisfied, and that does happen from time to time. It’s really a very close relationship that’s very beneficial for the shareholders, and we’re seeing investment companies reducing their fees, for example.

It’s been an ongoing trend within our sector and that’s come from the investment company boards who can understand the benefits of economies of scale for their investors and are therefore negotiating with the fund management group. We’ve seen boards being very proactive on issues such as whether the mandate, whether the objective of the company is still relevant for their shareholders. If it’s not, it is changed. So, we’re seeing boards being very proactive and acting in the interests of their shareholders. We’ve seen a number of companies merge – last year we saw a very high-profile merger with the Perpetual Income & Growth Investment Trust and Murray Income. This means boards merge, and potentially a change in manager. At the end of the day, boards are there to stand up for shareholders, and that is incredibly reassuring. That company structure also, for shareholders, allows them to vote, to have a say in how that investment company is run, to attend AGMs, to ask the chairman and the manager those difficult questions. That again is a very important feature of the company structure.

Moore – As a fund manager who is under scrutiny from my shareholders, effectively that scrutiny is being channelled through the directors, so I am being held to account. They meet me and we have very frank discussions about how the portfolio is being managed, about how the revenue account is set and to what extent reserves are rebuilding at the moment. Those conversations are only going to be positive for shareholders.

O’Brien – We’re under the same scrutiny: for reporting, for support – particularly around company secretarial services. The board of directors need to be convinced of our ability and integrity – certainly in a sales process, they have the final decision on which service provider is appointed. In my mind, when we are developing solutions and working through sales proposals within the investment trust community, it’s the board of directors who I have my mind on at all times. So, very similar in terms of the level of scrutiny that they provide, and rightly so because it’s the investors they’re protecting at the end of the day.

Funds Europe – Another area boards are focusing on at the moment is ESG, which as we all know is becoming increasingly important.

Moore – It’s important to the board, and to shareholders. Obviously, we ensure that we provide plenty of detail to shareholders on what we’re doing. If you think about the different approaches to ESG, I think you can boil them down to two approaches. One is exclusionary where you say, ‘We are not investing in this type of sector for XYZ reasons,’ and those could be, for example, companies that manufacture ammunition or companies that are involved in tobacco, those sorts of sectors.

The other approach, which we use, is engagement with companies, because we think that these companies will still exist whether we own them or not. So, surely the optimal route for society, to make sure that those environmental and social aspirations are met as a society, is to make sure that we are voting with a great deal of conviction on those subjects which matter to our shareholders and to wider society, so that’s why we go for that approach.

I also think, as the fund manager, it is going to help me to generate superior returns taking that approach. If you have a look at what’s going on in the world, there’s a shortage of energy and obviously you’ve got various ramifications from that. One of the key reasons for the shortage of energy is that it hasn’t been very windy for the past month and there isn’t much storage for that kind of power – so, surprise, surprise, demand for natural gas and other forms of energy goes up. Those are still required by the world. Now, there will be a time in the future, hopefully sooner rather than later, when there will be less reliance on those fossil fuels, but in the meantime, it would be helpful for the world if we are there ensuring that high standards of governance and high standards of environmental and social standards are met.

O’Brien – We have just released our third global ESG survey, which gathered the views of over 350 asset managers and asset owners. Many of the points Thomas makes were reflected in our survey respondents’ views on ESG. I see a massive convergence between ESG and investment companies and Thomas is living it on a daily/weekly/monthly basis. Because he doesn’t turn over his portfolio, he can really know the underlying companies: he learns what makes their boards tick; he can understand the data within those firms; he can encourage them to move down the path of proper ESG integration.

If you look at open-ended or higher-turnover structures, managers in that space may not have as much skin in the game or the depth of history with their underlying investee companies to exert influence and encouragement towards better ESG outcomes. That uncovers another great benefit for investment trusts.

ESG certainly isn’t over. Data is the key; there’s no doubt about it. The more enhanced, underlying data that an investor can get, the more integrated their investment strategy can be in the fund. The BNP Paribas survey shows exactly that.

So that’s a big focus for us as a custodian – helping our clients to capture the data that’s relevant to them. We have just launched a new automated platform called Manaos, which connects portfolios to a panel of the best ESG data and service providers, allowing investment managers to accurately measure the ‘colour’ of their portfolios in ESG terms.

Funds Europe – Thomas, let’s come to you for a final word on the future and how you see it shaping up.

Moore – We’re talking about different stakeholders here, aren’t we? First and foremost, we’re talking about the end investors, and Annabel’s already alluded to the need for solutions for these end investors. What gets me out of bed every morning is making sure that I do my utmost to achieve those solutions, so in my case, there’s a huge gap between the cost of living at the moment and what people are generating if they stick their money in cash or they leave their money in cash.

O’Brien – I see my job as trying to provide the services, the data, and the resources to allow Thomas to do what he does best. He relies on his board for governance and to keep him accountable, the investors have their role to play, and then Annabel has hers as well. It’s a holistic view and, if we all work together, the investment company vehicle can look forward very optimistically to the next 150 years.

©2021 funds europe