Investment trust boards need to up their game

But some of the changes were to team members rather than sole managers, and a number of the replacements are a different person from the same company rather than a board opting to change management group. Six changes were due to a broader fund management group change.

"So many high-profile changes in a relatively short period of time is in part a coincidence, with a number of managers having retired after a long period of managing their investment companies," says Ian Sayers, chief executive of the AIC. "And some fund managers simply choose to move on to pastures new. But it also reflects independent boards addressing long-term performance issues, a feature of the sector that is often underestimated but which can be of huge benefit to shareholders."

Unlike open-ended funds, investment trusts have a company structure with a board of directors. Boards appoint or dismiss the trust's manager, as well as make decisions on factors that can affect performance. For example, they can buy back or issue shares to control discounts or premiums to net asset value (NAV), and determine how much debt (gearing) a trust can take on to increase exposure to the market and potentially boost returns.

But some argue that boards have not been pro-active enough.

"At the beginning of the year we suggested that a six-year bull market and a sharp contraction in discounts had begun to breed pockets of complacency across the closed-end industry," says Alan Brierley, director, investment companies team at Canaccord Genuity. "There are some distinctly average companies that lack critical mass where significant absolute gains have masked the lack of alpha generation.

"Some boards seem to have forgotten that they are supposed to be acting on behalf of shareholders and not managers. Although boards are a key differentiating feature, for some companies what should be a strength is actually a weakness.

"Many have failed to use gearing, and in such a strong bull market, this is very disappointing and investors are entitled to ask: why not?"

Mr Brierley also criticises boards for giving incumbent managers too many chances. However, other analysts and investors say that there has been an improvement in board directors taking responsibility. "Boards have been more pro-active over the last four to five years, although some have been a bit asleep at the wheel," says Stephen Peters, an investment analyst at Charles Stanley.

Mr Brierley says that in general, boards and managers need to note the following:

• issuing shares in good times results in a moral onus to buy back in tough times;

• ensure management contracts align interests and reflect current norms;

• fees must remain competitive with the open-ended sector;

• remember who owns the company;

• serial buybacks are not a solution to poor performance or management;

• if you act as an open-ended fund then become one;

• greater interaction with shareholders;

• aggressive short-term investors should not receive preferential treatment over long-term shareholders;

• check how performance is presented - apples should not be compared with pears;

• skin in the game (owning shares in the trust); and

• if you act like an index fund then become one or don't charge active fees.

Good examples of change

Mr Brierley highlights Pacific Assets Trust (PAC), which we count as an IC Top 100 Fund, as "a poster child for changing investment manager".

The trust has been managed by First State Stewart for five years and materially outperformed the benchmark over that period in terms of NAV, while shareholder total return is second out of 73 open and closed-end Asian funds. "Growing recognition of the achievements of the manager has seen a strong re-rating in the past two years, and with the shares having reached a premium recently, the company has begun to issue shares to address excess demand," says Mr Brierley.

"While changing manager is not a panacea, we would welcome greater creativity and proactivity by boards to address perennial underachievers and closet trackers. The board of Pacific Assets took such decisive action back in 2010, and this has transformed the fortunes of the company."

He highlights BH Global (BHGG) and Edinburgh Investment Trust as examples of where boards have been able to renegotiate management contracts, making a significant cost saving for investors, while in the past couple of years a number of trusts have removed performance fees, recent examples including IC Top 100 Funds Pacific Assets Trust and Fidelity European Values (FEV).

Edinburgh Investment Trust also benefited by appointing Henderson's Neil Woodford as manager in 2008, after which performance improved. Mr Woodford has since left to set up his own company but Henderson's Mark Barnett has taken over at Edinburgh.

JPMorgan Japanese Investment Trust (JFJ) has improved over the last five years since appointing Nicholas Weindling as manager. The trust had made poor returns for several years but it now beats the Tokyo Stock Exchange 1st section in terms of NAV return over one, three and five years, and its investment trust peers over one year. Mr Brierley adds that over the past three years, the company is ranked seventh out of 68 open and closed-end funds.

While the trust's discount has come in to around 9 per cent, rather than being at a double-digit level as at times in the past five years, this is still considerably wider than peers such as IC Top 100 Fund Baillie Gifford Japan (BGFD), which is trading around par.

Monks Investment Trust's (MNKS) board has opted to keep the asset management house which runs it, Baillie Gifford, but in March appointed new managers who are using a different investment approach. This is based on the strategy of a successful open-ended fund. Monks had underperformed its benchmark, the FTSE World Index, both in terms of share price and NAV performance over one, three, five and 10 years. It had also underperformed the AIC Global sector average in terms of its share price performance over these periods.

Mr Brierley thinks that if its new managers can extend their strong long-term track record to the trust, performance should improve and the discount should tighten. Since we tipped the trust in mid April this has already tightened from 12 per cent to 8.6 per cent.

Mr Peters highlights Mid Wynd International Investment Trust's (MWY) board as being "positively pro-active". When its manager retired in April last year it chose to change investment house as well as investment manager, with a new investment approach. Over one year Mid Wynd has beaten its sector average and the FTSE World ex UK Index.

A more recent example of where a board has taken action has been with what was formerly known as British Assets Trust, now called BlackRock Income Strategies (BIST). Its board handed over management to BlackRock and then proposed to its shareholders that it change from being a global equities fund to a multi-asset fund. This followed years of underperformance.

No effect

Managers need time to turn around performance and prove themselves. The generally accepted time frame is three years on a rolling basis, and Peter Walls, manager of fund of investment trusts Unicorn Mastertrust (GB0031218018), adds that for some specialist assets classes this may not be enough.

When looking at if manager change is effective it is better to look at how the trust's NAV has performed since the new manager has started rather than the share price. The NAV shows what the manager is doing while the share price does not necessarily reflect this.

Manager change does not always work, though: Montanaro UK Smaller Companies (MTU) has changed manager twice in three years but underperformed its sector average NAV over one, three and five years. It has also underperformed the FTSE Small-Cap and Numis Smaller Companies Index ex Investment Companies indices over three and five years. It appointed Anna Lunden as manager in July 2014, after it was run by David Lindley between July 2012 and October 2014.

Alliance Trust (ATST) has changed manager a number of times over the last few years but has not succeeded in drastically improving performance over sustained periods. It has come under repeated pressure from activist investors and has recently enlarged its board in response.

Investment trusts that changed manager in the past 18 months

Source: Morningstar & *AIC

Performance data as at 15 June 2015

#Change of fund manager due to fund management group change