The Channel Islands trust sector is expected to grow, despite increasing pressure from beneficiaries for absolute returns, increased exposure to international investments and greater risk
In recent years, Channel Islands-based trust companies have faced increasing pressure from beneficiaries of trust structures, who are concerned by inferior investment performance, particularly against the backdrop of poor investment markets between 2001 and 2003.
In order to help alleviate this problem, an increasing trend among those trust companies has been to employ investment analysts or 'gatekeepers' to assist with the supervision of the trustee-appointed investment manager, who may have failed to spread risk sufficiently or adhere to the agreed investment strategy.
In some cases, beneficiaries may not have entirely agreed with, or fully understood, the investment objectives set by the trustee and the investment manager.
A significant number of the individuals who established trusts in the Channel Islands in the 1970s and 1980s have now passed away and the next generation of beneficiaries are looking very carefully at how the trust assets have been managed.
In many cases, their expectations are very different from the older generation because attitudes to investment management have changed. Many beneficiaries want to see absolute returns, increased exposure to international investments and increasing risk geared toward wealth accumulation, as well as wealth preservation.
Despite this, the Channel Islands trust sector, comprising more than 300 trust companies, is set for a period of strong growth over the coming years. A key reason for this is many trusts were established in the Channel Islands to hold the shares of private company businesses.
These entrepreneurs have now reached a stage in their life cycle where they are looking for an exit strategy and hence companies are being sold, perhaps through a trade sale, a merger with another company or maybe a market flotation. This has led to substantial inflows of capital into trust structures, which in many cases can exceed £20m per trust.
An additional factor fuelling the growth of trusts in the Channel Islands is the increase in the number of high net worth individuals (HNWIs), which has grown to 8.7 million globally. Because the tax advantages of establishing trusts have been greatly reduced, asset protection and succession planning is high on the agenda for these individuals.
With regard to the former, the increase in substantial divorce settlements has increasingly motivated HNWIs to use offshore trusts as a mechanism to protect their wealth, by taking advantage of more favourable trust legislation in other locations but still having their assets administered in the Channel Islands.
There is a need for an approach to wealth management that targets absolute or 'cash plus' type returns, without reference to specific equity or fixed income benchmarks. This will help trustees in achieving their desired investment objective without taking too many risks.
In Investec's experience, the most effective approach is to use a combination of traditional asset classes such as bonds, equities and cash, blended with more non-traditional asset classes such as structured products, alternative investments such as hedge funds and private equity, property and commodities.
Too often trustees target a broad-based equity benchmark, where the investment manager pats himself on the back for beating the benchmark during a particular period but may still have lost his client money.
Despite the challenges, the Channel Islands trust sector can look forward to continued growth, based on the excellent reputation, progressive regulation and the high level of intellectual capital of the Islands' workforce.
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