Speaker 0:
Hello and welcome to this investment. Trust on Asset TV. I'm Rory Palm. We've got a lot to get through today. We're gonna be looking at Alliance Trust. We're gonna be looking at China and the valuation opportunities. We've been looking at governance across investment trust boards and with me here in the studio to discuss that, we've got Sam Benstead, deputy Collectors editor, interactive investor, Chris Grant, chief executive officer at Barron and Grant and joining us down the line. Shaar Halberstadt, equity research analyst at Winter Flood Research.

Speaker 0:
Well, Sam, a lot to get through. Kick us off Alliance Trust. It's a firm favourite of a lot of investors. What's the approach there? Well, it's a multi manager approach. So

Speaker 0:
we have Willis House Watson, which selects 10 different fund managers, which pick about 20 shares each. So you get this portfolio of about 200 companies, which is supposedly market neutral. So they're not buying value shares or gross shares. They're allowing their expert stock pickers to find their best ideas out of their other portfolios and bringing those in to create a one stop shop for an investor.

Speaker 0:
And this is extremely popular. I mean, for investor is always in the top 10. Most bore investment trusts, and people use it as a core holding in their portfolio.

Speaker 0:
Chris Core Holding Alliance Trust. Is it one of those for

Speaker 1:
you? Yeah, absolutely. Across the board. Um, it was also the first investment trust that I ever bought myself, uh, Rory back in 1992 when they had a monthly savings scheme. So it was very accessible back then. And, of course, it's a a IC dividend hero Association investment companies, Dividend hero. 56 years that it's consecutively increased its dividend, which is some track record. I think there's only City of London.

Speaker 1:
Uh, that's got a longer track record. I think Bankers is also, uh, 56 years. So very long standing track, track record, 135 years of history. So it's seen a lot over that time. Uh,

Speaker 0:
Chava, welcome to you 2. 100 and 35 years of history and 56 years of dividend increases. It's a good, solid trust.

Speaker 0:
Well, uh, clearly, uh, that kind of, uh, record is impressive. Uh, dividend growth is beneficial. Uh, but also in performance. It's been quite strong over the last 12 months on both the NAV and and share price Total return basis. Uh, so definitely, uh, a fund that we understand many investors hold as a as a core holding. Mm. So going back to that core holding it's got high diversification. It's a solid income player as well. It must must sit amongst a lot of people's portfolios,

Speaker 0:
absolutely. And I think if you were gonna select one investment trust to hold for our customers, it's going to be Alliance Trust. Or perhaps F and C, which is another multi manager approach but all managed by Columbia Threadneedle

Speaker 0:
and performance has been, has been really good. You wouldn't have done much better than the Global Tracker. But that in itself is impressive, given that there hasn't been a growth bias at Lions Trust. They've missed out on holding Apple, for example, which is now a huge part of that MS C I world benchmark. Um, so you would have done well if you if you had a lion's trust, you would be very, very happy.

Speaker 0:
There's a point I want to bring up with you. They've recently added Dalton Investments because they're quite keen to increase their Japan exposure. What do you think about that?

Speaker 1:
It's a very wise move. I mean, the Japanese market has done very well of late. Um, you could possibly argue. Have they missed the? Have they missed the boat? We don't think so. Actually, we think there's still a lot of changes going on in Japan, which are very positive for the future. And

Speaker 1:
Dalton, um, based in L A. But they've got six analysts on the ground in Tokyo, and we think that's very important and a very important aspect there. The other thing, maybe people are not that familiar with is that Dalton actually also manage another investment trip.

Speaker 1:
Snip on active. And that's done very well, since that was that trust was launched. Now they take a quite an aggressive stance in terms of, um, a shareholder activism there with the managers, um, really looking to influence, uh, what's happening at the companies they invest in. I think alliance were at pains to point out that it would be a slightly more gentle approach. I think Dalton have been allocated 5% of of alliance, um, so far in terms of, uh

Speaker 1:
uh, their share of the pie but I think it's a positive. Rory. What do you

Speaker 0:
think, Sam? Japan moved quite good. I think it makes sense. There's always the danger that you come a bit late when the market does really well, then you react by investing there. But Japanese equities are still cheap. There is this corporate governance story,

Speaker 0:
which is really positive and 5% makes sense. Japan is about 5% of the MS C I World index. Having a specialist fund manager there with boots on the ground is probably the right way of approaching it. This year, active managers in Japan have had a more difficult time. It's been these big, cheap conglomerates that have done really well. So actually, only the index has been a really successful way of investing in Japan this year.

Speaker 0:
But Alliance trust goes with active managers. Good to choose a specialist approach there. And 5% seems about right. Uh, Cheval, we have got China coming up. But while we're on Japan, do you think 5% in that is is a good move?

Speaker 0:
Well, so, uh, as, uh, Sam and Chris alluded to, uh, clearly that there is this corporate governance sort of evolution ongoing, uh, in Japan, Uh, the the There's lots of, uh, development in terms of shareholder remuneration and, uh, to be able to play that, um we think that active management makes a lot of sense.

Speaker 0:
Uh uh, clearly, uh, previously alluded to to Dalton's specific experience. Uh, this has already played out. I think in the they're holding it in in ice in, um in in Japan. And so certainly, uh, this is a theme that can have a long runway. Uh, despite what performance might be, Uh, over the last 12 months,

Speaker 0:
Chris performance has been good, but can you see any issues coming up for the trust? If you're an investor in them, what do you think is coming up down the road?

Speaker 1:
I think Sam made a an excellent point. If you're buying active management and I think on the a IC definition, the ongoing charge is 0.61%. With this trust, you can buy an iShares, uh, global tracker that follows the old country,

Speaker 1:
uh, MS E I all country world index for a third of the cost of that. So that keeps the pressure on the active managers to keep delivering But to be honest, since Towers Watson took over these six years, I think it was back in 2017. There were the board shenanigans that led to Catherine Garrett Cox stepping down and and Towers Watson being appointed, and I think over all time periods that I've looked at since then,

Speaker 1:
um, alliance has managed to keep its head above that of the index and long may that continue for for shareholders.

Speaker 0:
So what do you think? Any issues ahead for the trust?

Speaker 0:
I think if we have a big growth rebound, so you know, inflation drops off, but we still have strong economic growth and interest rates come down. That would be great for growth shares and great for the index. You might see the trust lag a bit in that environment.

Speaker 0:
If we see rates stay high and we see value shares doing well, and perhaps oil is a big performer in the benchmark, then Alliance Trust could actually, you know, continues to deliver gains against the benchmark, as it has done over the past three years. But if you've heard of the six years with Willis, tell us, Watson, I don't see any reason to to change your holding. The outlook is bright there.

Speaker 0:
They're very clever in the way they manage their their fund fund managers that they outsource to. So if a manager is doing quite well, they might trim the fund's position a little bit. If a manager is doing a little bit more poorly, they might add to it. So you get this natural kind of diversification, Um, which has served investors really well so

Speaker 1:
far. I'm just surprised, actually. Rory on on that point. The active share was a bit lower when I looked at it than I thought it would be. It's down at 74%.

Speaker 1:
Compare that with, say, a monks at 84 or even SNT, uh, Scottish mortgage up at 93. I was just slightly surprised when I when I saw that that figure and I think the other issue I. I delved into the annual report, and they're, uh, they've just entered into a new agreement with, uh, Towers Watson on on the charges side. I think it's about Mid Div. When I looked on the charges, Um, but obviously you've got 10

Speaker 1:
best in class managers to reward, so that's not necessarily going to come come cheap. But, um, if you look, I think monks is roughly similar market cap size and probably 15 basis points cheaper. Um, so, yeah, the pressure's on to continue that strong record of out performance

Speaker 0:
given, given that most, uh, investment trusts not most but a lot of them have a high retail investor share base now. Do you think a lot of retail investors are quite familiar with active share? Do you think that's something that they monitor and and really are concerned with?

Speaker 1:
I think it's it. It's not actually commonplace for the fact sheets where private investors usually go

Speaker 1:
to contain that figure. Um, alliance. Quote it Scottish mortgage. Quote it. But it's not something that you see universally disclosed, Um so which I think would be useful if it if it was, because I think there are quite a few active managers that are purporting to be active managers who who may actually be, you know, more closet trackers.

Speaker 0:
Um, Shaar, the active shares. It's a big issue, and especially if you're buying a a trust that's fairly expensive compared to its index beer.

Speaker 0:
Um, yes, definitely. Uh, we agree with the idea that active share should be widely disclosed. We think this will be more important over time in in a higher rate environment, generally speaking simply because the the the impact of higher rates across companies is going to diverge in terms of how cashier in they are and how well they manage their treasury. And therefore, uh, it is entirely possible that active managers will have more of a benefit versus indices and therefore, uh, it would be helpful to have that disclosed

Speaker 0:
hM and and more on the diversification of the trust that the two here have touched on Willis Towers, Watson and their approach. But how important is that diversification? Especially if it's a core holding like that

Speaker 0:
That's absolutely important across the, uh, the global peer group. Uh, one word on cost there. Uh, generally speaking, alliance trust is sort of, uh, on par with the average of the of the global, uh, investment trust peer group. Uh, which is, uh, the way that average is just being, uh, pushed down a little by, uh, uh, Scottish Mortgage Trust. And And, ms, uh, but but from a cost perspective, we do not, uh, consider this an objection to investment in this particular case. Hm?

Speaker 0:
Yeah, so I mean, the cost of it is fairly average, but for investors, they'll be keeping an eye on that. Cost Cost is very important. When you're buying a fund of funds, you wanna make sure you're not paying twice. Um, so at 61 basis points and you're getting access to all these fund managers, which probably charge more than that if you're gonna access them as a retail investor to go in those specific funds And actually, for many of these managers, you wouldn't be able to. So they haven't got retail funds in the UK.

Speaker 0:
So for 61 basis points, I think that's actually a good deal. And, like Chiv said, it's It's typical for a global investment trust, but I think it's competitive for a fund of funds approach for well known and quite expensive fund managers. What do you think, Chris? Do you

Speaker 1:
agree? No. I, I think. Yeah, broadly agree with that. As as said, the 10 best in class manager. I think Sam made a excellent point there. I don't think perhaps Jupiter, but other than Jupiter Dalton,

Speaker 1:
um, you can't as a retail investor get access to to to those asset managers. It's incumbent, obviously on on tas Watson to to earn their corn as well by continuing to keep these managers on their on their toes. But I think over the six years that that that they've been in charge of doing that, they they've successfully done that.

Speaker 0:
So now moving on, we're gonna talk about China and again, there's a lot to talk about here, evaluation and then demographic issues in the country. So So kick us off. China's looking relatively cheap, quite attractive, but it's had a bit of a trap. What do you think? It's had a very difficult few years. Um, investment trusts in the sector. There are four of them. They trade on average at about a 15% discount. Now, um, the underlying market is cheap as well.

Speaker 0:
But what's holding its back is political issues. Basically, it's It's very hard for a lot of investors to get their head around investing in China and

Speaker 0:
accepting the risk that it's a one party state. And what the party wants generally is what goes and that can affect the fortunes of companies. So there's a big political risk there. Um, also, you have slowing economic growth. You have, um, you have the end of covid, but it's been a bit shaky coming out of it. There's lots of underlying issues, but the market is cheap. If you're buying an investment trust, it's cheap twice cos you're getting that discount. And for lots of retail investors,

Speaker 0:
it's a way of, you know, adding to emerging markets. It's a way of adding some more, um, adventurous positions to a portfolio.

Speaker 0:
I think Sam just said that it's a good market, but what do you think? Too many issues outside of that.

Speaker 1:
It's a market which is just too big to ignore these days. Um, so I think you've got to give it due consideration. Um, it's not without risk. I think everybody accepts that, um, as Sam alluded to with a one party state with one stroke of, uh of a minister's pen. They can make issues very difficult. Um, for companies and and in turn,

Speaker 1:
shareholders. I think Sam raised a good point on the political side as well. Um, this was something, um, Scottish mortgage. They've just done their first trip on post covid on the ground out out to China. Uh, and Lawrence Burns, uh, the deputy manager there made a very valid point, um, which was made to him by a number of people on the ground.

Speaker 1:
And that is that President Xi Jinping has now got his chosen premier in place. Who's a protege of President Yee? That wasn't the case before. And the premier, as opposed to the president in China, is usually the guy that's left in charge of running the economy

Speaker 1:
and being a protege and getting on with the president. I think the feeling is a pro growth and a pro business agenda will now be a lot easier to put in place than was the case previously, when the premier was a former rival of President Yee.

Speaker 0:
That's interesting. I didn't know that. Is there a time frame in mind for that?

Speaker 1:
No. So that's happening, and it's certainly people are picking up on that. Within the companies that that the Scottish mortgage guys visited recently on the ground, there's a greater sense of optimism

Speaker 1:
that you'll see a more pro-business approach. That's not to say that you still have the caveat of regulatory issues and again as as Sam alluded to the issues of the geopolitical tensions out there

Speaker 1:
with Taiwan being a particular you know, hotspot in that regard,

Speaker 0:
I just want to ask you one question on on geopolitical, and then we'll move on to more of the bottom up. Um, how do you see China, Is it is it a bit too risky to invest in? What's your position on it?

Speaker 0:
So, uh, clearly, as as Chris alluded to it, is too big to ignore. Uh, yet, uh, it it does require, uh, somewhat of an adventurous take to have a substantial overweight. Uh, there clearly has been this regulatory overhang that is not going away. There might be some. So some positive signs. But we've learned over the last few years to expect unexpected in that regard. And clearly there is this geopolitical tension. Uh, now you might see, uh, some green shoots. Uh, for example, the recent

Speaker 0:
visit by a bipartisan group of US senators, uh, met meeting with Xi Jinping. Uh, and and seemingly, having a constructive dialogue might help. Sort of temper, uh, these flare ups. But generally speaking, of course, there remains some amount of risk, which which investors should take into account. Hm. So for a long term investor say, with a 30 40 year time horizon, you could probably afford to ride out any small blips in volatility. I think so. And if you've got a 10 20 year time horizon

Speaker 0:
that now looks like a great entry point, you could have said that a year ago. And shares have still fallen of the of these investment trusts,

Speaker 0:
so you never know what's going to happen in the future. But given the size of the economy, um, given how many people there are there, given the technology story as well, you have some, you know, electric vehicle producers in China that are selling into Europe. Now you have lots of Internet companies. You have semiconductor companies which are coming through. They're basically trying to wean themselves off, you know, US and and European technology to be self sufficient. If that all works out, that's an amazing growth story.

Speaker 0:
But it should remain a satellite part of a portfolio. It's not gonna be a core part of a portfolio, but yes, for adventurous invest investors with a growth

Speaker 0:
with appetite for growth, then it does make sense to halt in China.

Speaker 1:
I think you can. You can play China in three ways. Really. You can actually buy, uh, a global trust. That's that's overweight. So again, we've mentioned bankers Scottish Mortgage Although Scottish mortgage have trimmed their Chinese waiting from 13 15% down to 13%.

Speaker 1:
So you can play the stance through an overweight in a global trust, you can then go regional and look at the Asia Pacific sector. And you've got, uh, trust like Pacific horizon around 30%. Um, uh, dragon, I think, has got around 30% as well. Um, on a on a regional basis, a bit of a contrast with Pacific assets that have decided to place their bet on on India.

Speaker 1:
Um, and again, as Sam said earlier, then you've got the four trusts that that are, you know, country specific. And, um, I mean, we we followed Fidelity China special situations and Dale Nichols for a long time there.

Speaker 1:
Uh, and if you look he's gearing up at the moment, I think that's that Trust got about 25% gearing, and DA's been around the market a long time. And so he clearly thinks that this is, you know, an opportune time. And he particularly points to the the valuation differential between China at the moment. And

Speaker 1:
you know, the lofty valuations that you're seeing say, in the S and P 500

Speaker 0:
shava Three ways to play China. Let's start with Fidelity Special sets and Dale Nichols. That's the pure play. What do you think of that one?

Speaker 0:
Uh, well, we we read it highly. Uh, it's part of our recommendations for this year as a pure play. Uh, china, uh, opportunity. Uh, clearly, they they focus, uh, they differentiate by focusing on, uh, sort of the SME segments and by having a having having a value orientation, uh, and indeed, uh, at current levels, um, stocks have to be considered cheap.

Speaker 0:
Uh, and so this is also driven decision making at Pacific Horizon, for example, which is an interesting example of a fund that has turned around its thesis. They were out of China well before, uh, all all of the regulatory, uh, issues that emerged over the last two years, uh, sold out significantly, uh, in contrast to the rest of Bailey Gifford as a house. Um, but now they are ramping up their China exposure and reducing their India purely on the valuation basis because they there's such a significant valuation differential that the belief is there must be

Speaker 0:
further leg up. Uh uh. I would add that that there's this general, uh, overhang of concern around economic growth, which is obviously valid, and certain sectors are naturally avoided, such as property.

Speaker 0:
Um, but I think generally speaking, it's important to retain the context that there remains, uh, substantial, uh, fiscal monetary policy space. Um, and this has been demonstrated. Um, but then, in addition to that, for example, just yesterday GDP, uh, numbers beat expectations and are still around 5%.

Speaker 0:
And so this this remains a high growth economy relative to developed economies. Uh, and therefore naturally some opportunities will present themselves.

Speaker 0:
So I want to stay with that valuation differential that Shiva mentioned there. So you've got India and China two massive populations, two big growth stories. But yet on the valuation side, it's China that's looking for more attractive. China is much cheaper. India is much more expensive, and Indian shares have done really, really well. One trust that is on our Super 60 list of recommended funds is specific assets trust so they can invest in in China and India. And they are underweight, China and overweight. India

Speaker 0:
and the managers there argue that in in India, in India you have entrepreneurs. You have family run businesses which are allowed to grow their companies, and you have very high quality assets, whereas in China

Speaker 0:
the companies are lower quality because they have to align with the state in order to succeed. So they've decided that although assets are cheaper in China, you're getting better quality in India. And if you're a long term investor, quality is the way forward. Hm Chris, given that valuations are where they are with China. But then in India, you have those family run businesses. Is it smarter than to play to play? Both

Speaker 0:
have exposure to

Speaker 1:
you can do that. And, as again, Sam alluded to You can do that through Pacific assets. It's where you want to place your chips, I would say in that part of the world. Steward investors who manage Pacific assets

Speaker 1:
put a lot of emphasis in the the G of ESG and it's there that I think that they believe that China falls down really in terms of options. I think they've got 9% in China of the trust at the moment, versus, um 45% in India.

Speaker 1:
Um, because they just see more opportunities there. Of course, we have got one political event on the horizon in India. That's the elections next spring, April May. But I think it's universally thought that Modi will be Re-elected. Um, and I think it's that consistency on the political side, which has also benefited valuations in in in India relative to to China over the last few years.

Speaker 0:
And I just want to bring up something and and, Sam, I'll go to you for this. So Global Emerging Markets Xin Strategies, um, produced by asset managers have gone from three in 2017 to 45 today that general move away from China but still with emerging markets exposure. Is that worth noting?

Speaker 0:
Oh, definitely. And it just shows how nervous investors are about China. China was an amazing growth story. It has been an amazing growth story for 20 years, but the politics has changed quite a lot. You have this deg globalisation, this decoupling from the West,

Speaker 0:
at least in the rhetoric I mean, in terms of business deals, there's probably a lot to be done there still, and so there's appetite for strategies that give you emerging markets. That gives you the young, exciting emerging market populations without that political risk of China.

Speaker 0:
And if you didn't own China for the past two or three years, you owned emerging markets. You would have outperformed, um, because of that India component. So it makes sense why those strategies have have taken off and why there's money flowing into them. What do you think, Chris I? I

Speaker 1:
think one of the key aspects invested in that part of the world it boots on the ground as it were, and I think, local presence. And you've seen that in some of the best performing Indian trusts? Actually,

Speaker 1:
um, I think it, uh, but overall, a diversified strategy to the emerging markets, I think is is the way to be, uh, and the way to be positioned. And I said, You can do that either by looking at a global trust or an Asian Pacific Trust, as opposed to necessarily going for one of the four specific Chinese investment trusts.

Speaker 0:
Cheval. What do you think diversified when it comes to emerging markets, Or are you more concentrated in in certain parts?

Speaker 0:
Well, I think in terms of having EM trusts that exclude China, this makes perfect sense in terms of investor appetite. As in, there are plenty of investors that want to be able to size their own China allocation. And so having uh, EM fund, excluding China, kind of takes that specific regulatory geopolitical risk off the table, and then investors can invest according to their own appetite.

Speaker 1:
I suppose the the one thing I would say Rory is there is an element of China sneezes. A lot of the economies in that part of the world catch a catch a cold. That's just something to to be be aware of, too.

Speaker 0:
Is that lessened now? Since we've had decoupling of supply chains in countries more self sufficient on their

Speaker 1:
own, I think there's an element of that. But again, like the UK market, is still linked to the fortunes of the U SI think it's still a You know, it's still a factor,

Speaker 1:
um, to to consider, um, but you look at the interactions of the economies in that part of the world um, you know, you look at Vietnam, Look at Hong Kong. Look at Korea. Look at India that there are. They're all intertwined, really in terms of the fortunes of of the economies. And that's why I think Sam's point is a good one that you know, to to play an emerging markets trust as a whole that does have the ability to invest in

Speaker 1:
China. But tilt, uh, is is probably the best option. So

Speaker 0:
I'm unconscious. We have to move on. But for investors that do invest in this part of the world when we've covered quite a lot, what would you say? Well, Fidelity China's special situations is on the Super 60 list of recommended funds. If you're looking for a diversified approach to China, about 100 shares in there about 15% in private companies, that is our pick. Um, Dale Nichols, the manager, has been in charge for a long time and

Speaker 0:
and and has done a good job. Um,

Speaker 0:
so that is the one of the ways you can do it. Take the diversified approach. Um,

Speaker 0:
but as Chava said before, it's about managing your own risk. This is gonna be a satellite part of your portfolio. It's gonna be very volatile. But it is gonna be uncorrelated with a lot of other things in your portfolio, especially given that it's not in. Um, it's not in the MC I world, so if that's your preferred route of tracking global markets, there's there's no China in there. So it is kind of its own market, so that can rise and fall when other markets are doing other things, which is potentially appealing.

Speaker 0:
And Chris Dale Nichols, he he's gone all in on China, so time will tell if if that's

Speaker 1:
the right bet. A. Absolutely Yeah, he's, uh, yeah, a real advocate. And he's geared the trust up. So it's positioned for for the recovery. Um, I think he had still acknowledge that the consumer is still wary. In China, you've got high youth unemployment, so there are still hurdles to to jump.

Speaker 1:
Um, but if his call is right, then Fidelity China, uh, special situations is perfectly positioned to benefit, um, benefit shareholders.

Speaker 0:
Excellent. We'll leave China there. We'll move on.

Speaker 0:
So moving on our final point here is about governance and trust investment trust boards. We've had a lot of trust recently run into some difficulties. Is it to do with governance to do with outside factors? Well, our panel are gonna dissect this now. So, Sam, again, we've had a few trusts recently that have run into issues, and we're gonna cover four during this session. From a governance standpoint, what jumps out at you what's happened? Well, we've seen a number of complicated, quite new trusts which have been launched in the past couple of years

Speaker 0:
to fill gaps for investors. And that's generally been gaps about growth and gaps about income.

Speaker 0:
And what has happened is that some of these trusts have actually run into difficulties, I think not because of pure governance issues, but because of the complexity of the assets that they've been investing in. And I think not as many investors as should have done actually fully understood how these trusts were going to make money and understood the risks involved

Speaker 0:
in the event of a rising interest rate environment. So we've seen lots of specific issues at these alternative investment trusts, which are now only starting to appear. We think its complexities and investors didn't understand the what's under

Speaker 1:
the bonnet. Yeah, and I think the boards didn't in a lot of cases. Um, if you're a non-executive director of an equity trust and we've discussed alliance today, Um,

Speaker 1:
I think with a lot of experience, you can fit in the markets in the financial world, you can fulfil that role. I think a lot of these specialist trusts are crying out for more detailed technical knowledge on the part of the non-executive that make up the board. And that's not being disrespectful for to the boards that these trusts have.

Speaker 1:
But I think you really do need some detailed technical skills to understand, as Sam said, the complexity of of these instruments and I don't think that's been the case. And as a result of that, in some of the blow ups we've seen, I think the board could genuinely be accused of being in, in some cases, asleep at the wheel.

Speaker 0:
S. What do you think these are? These are difficult trust. They're specialists. Do they need a specialist board to be at the helm?

Speaker 0:
To some degree, Uh, that kind of experience would be useful on the board, but generally speaking, it's It's also about applying scrutiny even when times are good. Clearly, some of these issues are caused by not being prepared for a higher rate environment. Part of that responsibility falls on the board to do due diligence on the manager's approach.

Speaker 0:
Um, And so, uh, you see that on one side on the other side, there have been actual occasions of of manager, uh, misbehaviour that should that should have been checked at an earlier stage. Hm. So I'm going to back to the alternative. So hypnosis, song royalties and social housing to is another area. Is it something that is a good idea in a low interest rate environment? And then when rates go up, it's it doesn't look as good.

Speaker 0:
They sounded like amazing ideas at the time. When you get less than 1% you know, from guilt, for example, investors were desperate for income. They were desperate for a new story. And if a trust appears offering you what they would have described as inflation linked uncorrelated income, that's gonna work in any economic environment, and it pays you 5% when rates are at sub 1%.

Speaker 0:
That's extremely appealing to investors. So no surprises that money flow into these, but when you can get 6% from the investment grade bond market in the UK 6.5% 5% from gilts. The investment case for these types of trusts suddenly disappears. It's suddenly weakens. And then when you add the complexity, take hypnosis songs, funds.

Speaker 0:
Actually measuring and calculating the income you're going to get from song royalties is is a tricky process. And we we had a legal ruling a few years ago, which meant that the share that went to the um to the right owner went from 10% to 15%. There should have been great news for someone like hypnosis, but actually in the recent dividend cut, that was the reason for the bad news. So I think there's just a lot going on under the surface, which

Speaker 0:
there's not enough understanding about. And in this high rate environment, complexity is not great and you can get better returns from the bond market. So that's why we've seen this flow of money because it's a shame, because social housing is a good cause, and if people can use an investment trust to play that theme, it would be great,

Speaker 1:
very laudable. Um, course and and a and a trust that we did. We did hold.

Speaker 1:
Um but unfortunately, um, I just don't think that the the the board was really up to it in that case. And, yeah, I I I'd make another point When Viceroy who were the, um, research house in In, uh, the States that that came out with a report. It was 22nd, November 22

Speaker 1:
um, that they published that that report it was, you know, it was very damning. And the initial reaction of home, uh, W was a complete rebuttal of all of the accusations that were made in that report. And then if you look at how things have unwound over the course of the, uh, coming Y the the the year since that report, uh, a lot of their findings have effectively come to to fruition.

Speaker 1:
We always have AAA saying in our business of humility at all times, um, and and I, I think perhaps Homer would would regret that the the way that they actually issued, you know, uh, the firmness of the rebuttal that they did. Um, they've been more contrite since, um, but yeah, Sam said it's a great, great shame. Really?

Speaker 1:
Um, that that that trust has, you know, as as, uh, uh, its crest as fall. You know, it's crestfallen now the shares are still suspended. As far as I'm aware, they have appointed a new a new manager to see what can be salvaged. I'd make another point. Rory, I think auditors have a lot to answer for here. Um, auditors. I know a a across the

Speaker 1:
space have come in for a for a lot of stick. But what are the auditors doing? You know, as effective as a chocolate fireguard?

Speaker 1:
Really? You know, in in this case, And I'm afraid, as a former investment analyst myself, Really, Viceroy, why, why wasn't one of the investment houses here, uh, diving deep and looking from a research perspective into what was going on at home? You know, it would have been a great story to break over here, Uh, and I'm gonna put a shout out there for for the guys at Investec led by Alan Brearley.

Speaker 1:
They are one of the houses we really respect on the sale side because they are willing to put their head above the parapet, which is often difficult. I've managed the conflicts with corporate broking. Hats on relative to institutional sale side research myself and grappled with those dilemmas for many years.

Speaker 1:
Um, but not only his skin in the game report, but often where they go outright sellers on trusts and delve deep. And that's what you you've got to do. So I think there are various players that can learn lessons here, Um, for what's happened in, you know, all of these blow ups that we've we've seen. I don't think it's as bad as the split capital trust crisis we saw about 20 years ago. Um,

Speaker 1:
but it has entered investor confidence. You know, again, I can see parallels. You know, back in the day, split Capital Trust were seen as a a great solution for investors that wanted different things, you know, in particular income. In the case of those vehicles, um, and and, of course, these speciality trusts offered the prospect of uncorrelated income. That was great. Um,

Speaker 1:
but of course, it's all unwinding now.

Speaker 0:
Investec Skin in the game. Did they release figures on how many NE DS actually invest in the trust? Is that figure

Speaker 1:
out staggering? Um, I think we're going to discuss four we're going to discuss home. We're going to discuss, uh, nine in digital nine infrastructure. We're going to, uh, discuss Taylor Lloyd, I think as as well as hypnosis and I looked at the stats and I don't think I think I'm right in saying

Speaker 1:
that the total combined shareholdings of the directors of each of those trusts is less in each case than those directors taking fees for one year.

Speaker 1:
Uh, and I really think skin in the game is important. You you share the game, but you share the pain. It's a brilliant piece of work, uh, with no disrespect to shaver that that one of his competitors produces. Um, but I think it's very telling. I mean, look at the shareholders. Uh, the the four. I think directors of home look at their combined

Speaker 1:
shareholding. I think the last time the report was written, it was about £50,000 where the fees that that board were taking was around 100 and £60,000.

Speaker 0:
I'll bring you into the game here, um, skin in the game. It's It's so important. Especially for these board directors.

Speaker 0:
Uh, yes. We definitely think this can Can be helpful on on on a more general point. Certainly there is also a responsibility for sale side research teams to to dig in and call out these issues issues when we come across them.

Speaker 0:
Um, in the case of home, we we we did not do a deep dive. Uh, because clearly, in a sector of 300 funds, uh, there there's a lot to cover. Um, but I think it's it's very helpful if either ourselves or, uh our our colleagues in other firms, uh, come up with these, uh, assessments.

Speaker 0:
And so, um, yes. Generally speaking, we think skin the game is is favourable. We we do not believe that it is necessary for, uh, the for for appropriate governance, as this is the case as well in in large Corporates, th th this is not, uh, sort of necessary condition in order for successful oversight.

Speaker 0:
So a point Chris made earlier was about humility there. And when the board and the investment manager, their relationship breaks down, everyone in the trust suffers. How important is that? Humility and how important is transparency as well? Oh, it's essential. And if you want to keep the confidence of the shareholder base. You have to be humble. And the board has to

Speaker 0:
prove that it is fighting for the interests of the shareholders. And they have to make their position clear and take action. And that might mean finding a new manager. But they've got to say we work for the shareholders. We're here to provide good governance, and they've got to act decisively and communicate clearly.

Speaker 0:
When the continuation vote was being talked about Thompson Lloyd, it was called a distraction. And I think that's an important part of governance. But unfortunately, it was discarded as if it wasn't

Speaker 1:
The continuation votes are not a distraction, in my opinion. Um, they they they're a great, uh, checkpoint, um, in a trust life. Uh, and I think, uh, you know, very valid, um, to, you know, to keep the boards on their toes and the investment managers on their toes, because if a

Speaker 1:
trust is wound up, obviously there are no fees. Uh, for those two groups,

Speaker 1:
um, so, yeah, continuation votes for me are an important aspect. So we've got one on the horizon for song, which is going to be very interesting on the 26th of October. Um, yeah. In each of these cases, the the, uh, the boards have really upset the shareholders, I think. And it has tarnished the appeal, uh, of of this speciality, uh, sector.

Speaker 1:
Um, and you know, that's a shame. Really? Because, as you said, the underlying aims of some of these investment trusts, particularly home and and trying to address the issue of homelessness, you know, are very are very laudable. And and I think just to bring in one of the, you know, we had the boardroom scuffle at at Scottish mortgage earlier in the year. Um, Scottish mortgage could do no wrong for a long, long time.

Speaker 1:
Um and I, you know, again humility, I think is a is a key byword for for all of us, uh, you know, involved in in this sector and this industry. Um, because I think perhaps Scottish mortgage that believe that everything they touch was going to continue to turn to to gold. Um,

Speaker 1:
and you know, in investment, that's never going to be the

Speaker 0:
case. We're gonna come back to tenure because I think it's an important part of of how the boards make up. But shard looking at digital nine de destroyed credibility with investors when it said it was gonna scrap a dividend target. And then it did. We've talked about humility, but communication is also key. And when you say you're gonna do something and go back on it, it's hard for the investors to trust after that

Speaker 0:
100%. Um, I think digi is a is an example of the fund that was not prepared for the higher rate environment. Uh, because, as is the case with several of these other, uh, funds, the underlying um, offering, of course, is still still viable. Um, but if you over leverage are not prepared, uh, for the high R environment and then you know

Speaker 0:
all of these capital requirements at some point things become unsustainable. You end up breaking your word. And then, um, it is very difficult to recover from that from an investor confidence perspective. Hm.

Speaker 1:
I think one thing Rory that has stood the test of time that I learned 30 odd years ago when I came to the city was under promise and over deliver,

Speaker 0:
Do you think? And hypothetically here, Do you think these trusts would still be in a good position if we had had a pandemic, if rates were still where they were, do you think they'd have just kept sailing through

Speaker 0:
I? I think so. I mean, in the case of Home Re, that's a bit different. There's allegations of fraud, and it seems like that business model didn't work. Um, hypnosis as well. There's questions over that royalty income stream. So maybe there could be question marks about the the the music royalty,

Speaker 0:
um, sector. But gen generally speaking, I think, yeah, if rates remained as low as they were, the case for alternative income would still be extremely attractive. I think definitely a lot of these are indeed, uh, interest rate driven, Uh, in the sense that indeed, home read is just pure failure of due diligence by and due diligence on the manager. So

Speaker 0:
let's set that aside for a moment. But for example, indeed for, uh, for hypnosis. Uh, if we are in a in a low rate environment, of course the the the underlying proposition remains a lot more attractive because, simply, uh, there is structural growth factors pushing the asset class as a whole. And these royalty revenues are very interesting, except when you compare them to the current high level of of of of treasury yields.

Speaker 0:
And so, um, uh, I think it's a good point, Sam made with regard to the reliability of these of these revenues in terms of, uh, uh, song having to, uh, write down their their expectations of what they will receive. But I would point out there that that is driven by them already having received over the last number of years more revenue than they thought for a song, which is something they've only been able to unwind recently when comparing it to this year, Uh, with, uh, when the new regulatory rates in the US have come in.

Speaker 0:
Uh, so you could say that this is potentially failure of being able to scrutinise your historic revenues. But indeed, there are structural tailwinds from a regulatory perspective for that asset class.

Speaker 0:
Um, Chris, you touched on this. And these are specialist investment trusts, but wider than that. Do you think this has damaged the whole trust space and confidence in it?

Speaker 1:
I. I think I spoke about the the split capital debacle way back and I. I think, given how many trusts I mean, there were 19 trusts, I think suspended back at that time, there was a an FC a or the equivalent organisation back then inquiry. It went to parliament. It was a heck of a lot of damage. These are still isolated cases.

Speaker 1:
Um, but nonetheless, uh, they have definitely tarnished. Um, they've tarnished the reputation of some of these specialists. I think this also is a wider issue in relation to the share holding structure of the investment trust world. Now, um, Argus Vickers did a lot of work on on where the where the sector, Who the sector is held by now, Um, and and retail investors. And I'm sure Sam will see this at at interactive,

Speaker 1:
uh, are are much more prevalent across the sector. There was a time when investment trusts were the preserve of the the regional wealth managers. Um, that's changed. You know, I think over half of the sector now, as as a whole, uh, is owned by retail investors. Um, and I've heard it said that one or two people believe that the wider levels of discount that we're seeing across the sector, the increased share price volatility is perhaps down

Speaker 1:
to the influence that retail investors are having on on the sector again. That would be an excellent piece of research to undertake to try and analyse that,

Speaker 1:
Um, generally, I think it's the case that retail investors are seen, whether whether it's true in reality, but are seen to be perhaps a little bit more skittish and nervous when when things go wrong and inclined to sell where professional or institutional investors may take a longer term view.

Speaker 1:
Um, it certainly was the case in days gone by. I think that that professional investors were were better informed. I think the DIY platforms have done a fantastic job, uh, at, uh, democratising the access to to research and information.

Speaker 1:
But I, I think the I the impact of retail investors isn't to be underestimated on on on what's happened in certain cases.

Speaker 0:
And Sam as a DIY platform yourself the ease at which you can go in and out of trust. Do you think that's contributed to this

Speaker 0:
contribution to volatility?

Speaker 0:
Yes, I probably would agree that retail is is slightly more, um, in and out than than professional investors. The timelines might be shorter, Um,

Speaker 0:
but the fact that retail has such a large shareholding in investment trusts, I think is very, very important. You know, investment trusts are great for democratising access to hard to reach

Speaker 0:
asset classes or fund managers in the case of alliances Trust. So, actually, the fact that retail is so keen to own trust is fantastic because it puts them on the same terms as many institutional investors and sure to you as well. So retail investors, But they are have a shorter time horizon and perhaps are more skittish when it comes to these big, big volatility swings.

Speaker 0:
Yeah, absolutely. I mean, we welcome the participation of retail in the sector. Clearly, uh, that could come with a little bit more volatility, but, uh, we don't believe that that contributes to a specific discount level.

Speaker 0:
Um uh, look, indeed, there are many propositions in the investment trust sector that retail investors could not access in any other way. So I think that is generally, uh, uh beneficial in terms of the discounts rates, Uh, the discounts that we are at at the moment.

Speaker 0:
Um uh, that is a challenge. Uh, these governance issues are a challenge. Uh, but but we believe there. There's a chance that, uh, on the back of this on the other side, uh, there might be a silver lining where where we see the investment trust sector overall emerge stronger. Um, we've seen lots of merger activity, meaning that we we'll be left with larger and more liquid funds, Uh, and also therefore, funds gravitating towards the stronger managers within a particular subsector.

Speaker 0:
Um, we we might well see, uh, I improvements in board governance because it's not clear. Uh uh, What can happen? Uh, if insufficient attention is paid to certain developments, Uh, and so we might come out of this on the other side, Uh, in a stronger fashion. Chris, I did say I'd come back

Speaker 0:
to this as well, but tenure tenure was an issue with Scottish mortgage. We had that blow up before, but with nine years as a tenure for a chair, but with an NED, there's no set limit, just keeping the boards fresh. Keep that governance also quite

Speaker 1:
fresh, too, but very important. And and I think this is where the retail investor comes

Speaker 1:
back into the equation as well. Because a GM SI think are still vital. They give retail investors the opportunity to quiz an investment trust board and and keep them honest. And, uh, you know, I. I often attend retail events as well as institutional events. Uh, and it's interesting. Um, take the a IC. Conference last this time last year.

Speaker 1:
Um, the retail investors tend to ask very pointed and direct questions that, um, some professional investors will perhaps be more nervous because of relationships, etcetera to actually ask, uh, and let's not forget, back in 18 68 I think it was

Speaker 1:
when foreign and Colonial was established. Um, it it was established for retail investors. You know this This sector has has always had appealed to to retail investors and long May that continue and Long May retail investors continue to probe the board of directors who ultimately are are responsible to the shareholders and answerable to the investor. What do you think? So

Speaker 0:
it's fantastic that retail is involved in the space. We see lots of customers that are probably holding on to some trust their whole investing lives. Um, and like Chris said, they ask tough questions. They're not worried about ruffling feathers, and

Speaker 0:
it's refreshing to see and important that they continue to back the trust space because trusts have delivered great value to investors versus open ended funds in some areas over long periods. So it's good that investors are there. It's good that retail is there as well. CHR I've been at the winsford conference, and I've heard some of your questions for the managers. It's good for keeping us honest. It's good for the trust space in general.

Speaker 0:
Yes, definitely. II. I think a core benefit of this structure is the ability to engage, uh, in a in a public manner the responsibility that the that the board and the fund managers have to sort of give an accounting, uh, of their decision making and their and their progress over time. Uh, this also relates to to to the governance issues that we speak of. I mean, in the end, For all of the the

Speaker 0:
the funds that have have struggled with governance issues, shareholders do get the final say in continuation votes and having to accept certain proposals or not. So, uh, at the end of the day, this structure still provides benefits to shareholders, uh, that they will not be able to, uh, to get access to another other structures. I think that's a great place to live it. Well, I do hate to cut the conversation there, but thank you very much to Shiva. Thanks to Sam. Thanks to Chris. Thank you very much for watching, and we'll see you here on us at TV next time.