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A question of class

Just months after it decided to shift towards manager of manager, £1.4bn investment trust Witan has revealed that it may branch out in other asset classes to boost flagging performance.

Chief executive Jim Horsburgh said last week that the equity-driven portfolio could soon invest in fixed interest, private equity, absolute return funds and property in what would be a drastic shift away from existing policy.

The move has been hailed in some quarters as a progressive step to improve shareholder returns but other trusts in the global growth sector have largely declined to pass judgement. Many of them are also equity-only companies and argue that their mandates depend on what shareholders want them to do. But some observers believe Witan&#39s move has thrown up some testing questions about the global growth sector in which it sits.

An industry source says: “The sector is more diverse than it is given credit for but some of the trusts are doing broadly similar things, investing in global blue-chip stocks. The interesting point Witan has raised is whether such mandates are going to be appropriate.”

Although the source believes there is no reason to suspect these mandates will not necessarily be right in the future, Horsburgh clearly feels that, for Witan at least, investing in mature stockmarkets has only encouraged closet tracking. But his solution, although welcomed by analysts, has polarised opinion. Caledonia Investments, which runs the £930m Caledonia investment trust, is one of the few managers in the sector which invests in other assets, including property.

Caledonia takes significant long-term bets and works closely with the management teams of the companies – private or listed – in which it invests. This approach has worked exceptionally well over the past 10 years – a period in which it has consistently been in the top decile. This performance has led its management to question the policy of changing mandates. Executive director John May says: “If you set your stall out to do something then do it well. But if the performance is not there then I am not sure that the answer is to change the mandate.”

For other observers, chan-ging the mandate does present a solution to what they believe is the biggest problem facing the global growth sector – oversupply.

Iimia chief investment officer and fund manager Nick Greenwood says: “The problem is really that the global specialists are so big – it is the number of shares in issue.A lot of them will be looking to see how Witan develops. But they cannot ignore the demand for absolute-return funds. The sector is evolving and we will see more changes – if we do, the oversupply will shrink.”

Aside from Witan, the other big change in the sector has been Scottish American&#39s decision to replace previous manager First State with Baillie Gifford. The change – not uncommon in itself – also involved the trust being reclassified in the global growth and income sector to reflect the board&#39s decision to place greater emphasis on achieving progressive dividend growth. At the very least, Greenwood believes this type of move will become more common even if boards shy away from more radical, Witan-type changes.

Some trusts, however, do not believe there is a problem within the sector, arguing that diversity is provided by the nuances between trusts – even those run by the same manager. Baillie Gifford investment trust development manager Robert O&#39Riordan says the trusts that the group manages all have different characteristics and aims, which provide the requisite variety. He also points out that Scottish Mortgage, for example, has a fixed-interest element. But he says: “On the whole, we are specialist equity managers and we do not have great knowledge of, say, private equity. But that is not to rule it out completely for the future. Never say never.”

Riordan is at pains to point out, however, that Baillie Gifford has no plans to diversify into other asset classes. But analysts believe that an increasing number of trusts will be forced to look further afield as competition hots up with other forms of investment.

Arbuthnot Securities investment trust analyst Tom Tuite-Dalton says: “A lot of people running discretionary money are looking towards hedge funds and the big trusts are therefore competing against absolute-return funds. They are just hoping for a bull market so it is less of an issue. I think they are going to have to take the Witan approach because it is becoming more and more competitive.”

Mainly because of this clamour for assets, Tuite-Dalton says the big trusts will increasingly target retail investors, who he believes will continue to buy trusts on a low discount if they think they are getting downside protection. Therefore he believes many trusts will be forced to diversify to other asset classes – albeit at a slow pace.

The AITC, although stopping short of suggesting that trusts should change their mandates, acknowledges the challenges the industry faces. Speaking at the recent AITC conference for directors, AITC chairman Alex Hammond Chambers lamented the impact that hedge funds have had in such a short period of time.

He said: “All sorts of numbers exist for the size of the hedge fund business – between $250m and $500bn are numbers I have seen. The point is that after 150 years in business we are only a tenth or so of the size of this new business. It is serious competition for us.”

If the investment trust industry is to prove its worth “then we must have the best boards and the best managers on the job” he said.

Arguably this has not always been the case, which is why observers believe that competition will force trusts to act more radically than they have had to before. If they rest on their laurels, the future could be bleak for a good many of them.


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