Simon Fraser and Paul Niven, chairman and fund manager respectively of the £3.5bn F&C Investment Trust, talk to Jayna Rana about how they are celebrating the 150th anniversary of the world's oldest trust.
It is a special time for the investment company universe as 19 March 2018 marks 150 years since the launch of the world's oldest fund - the F&C Investment Trust - and thereby the birth of the closed-ended sector.
The trust has had ten managers during its lifetime, with current manager Paul Niven, head of multi-asset investment at BMO Global Asset Management, having run the portfolio since 2014.
Launched in 1868, the vehicle has survived two World Wars and many a stock market crisis.
It has also evolved over that period; most recently the trust was renamed as the F&C Investment Trust from the Foreign & Colonial Investment Trust to reflect its "relevance in the modern world".
With an IPO of £588,300 the trust was originally set up to provide access to overseas markets, investing in 18 "foreign and colonial" government bonds across the globe.
Its exposure to government bonds decreased over the years as it started investing in corporate bonds and mortgages in the 1890s and then in equities in the 1920s.
Today, the trust is invested primarily in an internationally diversified portfolio of publicly- listed equities, as well as unlisted securities and private equity, while it has grown to £3.5bn in size.
In its full-year results for 2017, the board also announced a 47th consecutive annual dividend increase to 10.4p per share.
Now, on its 150th anniversary, instead of focusing on its own achievements, the F&C IT team is celebrating the success of the entire investment company sector, and using the milestone to get more people interested in learning about and investing in closed-ended funds.
"This is an appropriate time to recognise that investment trusts are unique," says Fraser.
"Our key theme is to reach out to a broader group of potential investors who could benefit from their long-term nature. We are particularly targeting younger people and are doing a lot in terms of financial education and working with schools and universities.
"The curriculum could do a better job at explaining things like saving and the benefits of compound interest. It is not easy, but it is not as difficult as some people make out."
The onus on educating consumers about investments has been an industry-wide theme for some time now.
"Now more than ever, people have to take control of their own savings," Niven adds.
"They have to make provisions for their future and we can help make people aware of that.
"The best way to change that is on a generational level because there is an entire generation now who will not benefit from a government pension."
It is also widely believed in the investment trust community that education on closed-ended funds could be stepped up within the industry, to increase their popularity.
There is a consensus that prior to the Retail Distribution Review (RDR), financial advisers did not consider trusts as often as open-ended funds due to not receiving commission for recommending them.
However, although the RDR (which was introduced at the end of 2012) banned commission, there is still a hesitance from some advisers to learn about trusts, which is often attributed to the perception they are too complicated due to their ability to gear and trade on a discount or premium to their net asset value.
While the F&C IT team appears to have accepted the adviser community will continue to be a tough group to turn around, they remain confident that trusts are becoming more popular through their increasing inclusion on online platforms, allowing people to make their own investment decisions.
Fraser says: "In this day and age, where people buy things more instantly on the internet, the trend we are seeing is one where more individual investors are buying trusts directly online and that trend is continuing to grow.
"A lot of private investors tend to make the active decision to buy a trust themselves rather than be advised by an IFA and I am confident we will see more of them.
"Open-ended funds are bigger and have their role to play but trusts have an important role too. The things that make them unique are all positive and greater transparency will help people see that with time."
Boards are 'crucial'
As with all investment trusts, F&C IT has its own independent board, which is responsible for all structural decisions. Simon Fraser, chairman of the Investor Forum and former CIO of Fidelity International, has been chairman of the board since 2009.
There has been some pressure on investment trust boards in recent years as a number of well-known funds have had to undertake strategic reviews while others have been wound up, but the F&C trust has so far been immune from this activity.
"Boards do not have a lot to do when things are going well but when things are going less well, they are critical," says Fraser.
"If things need to be changed or new initiatives reviewed then the board comes in. The continuity you get through a board, if managed correctly, is crucial, especially during this uncertainty we face around Brexit and the potential implications of regulation."
Though the F&C IT board is indeed completely independent, Niven and Fraser say they still work closely to ensure the interests of shareholders are put first, which they believe is why the trust has never been the target of an activist shareholder or required a strategic review.
Niven adds: "We have had issues periodically but nothing so big that it required a turnaround. The board is independent in that they set the strategy but it is very much done on a collaborative basis.
"For example, the decision to increase our global exposure in 2013 was made from an observation by former manager Jeremy Tigue about the changing market environment and then a discussion with Simon.
"It was a tactical decision to reduce our domestic bias, exploit more opportunities around the world and eventually move from a composite index to a broader global index. That has since proved beneficial for shareholders."
However, while changes like these are considered and executed by the board itself, there are other aspects that also need to be dealt with by the team, such as a changing market environment or new regulation.
This includes the recent implementation of PRIIPs regulation and within that, the requirement for trusts to provide expected returns following four potential scenarios as part of their Key Information Documents (KIDs), which has caused something of a stir among the trust universe.
The industry has argued these scenarios, which are based on five-year historic performance, could be misleading, especially given the strong run for equities over the period.
"Regulation is a good thing and clearly an industry like this needs proper regulation," says Fraser. "But the challenge is getting the right balance. It might not always bring a lot of benefits.
"With regards to PRIIPs, there has been a consultation but there is still not enough understanding of what either side is trying to achieve.
"Inappropriate numbers are being used to measure risk and potential returns as the formulas are more suited to bank-type products.
"But the stock market can go up or down very little or significantly in days or weeks. Past performance can never be an indicator of future returns."
Niven adds: "It all depends on what you are trying to achieve and what your objectives are. Our fund's are long-term growth of capital and income.
With that in mind, short-term volatility does not matter. The longer your hold period of an asset, the higher the probability of return but people feel losses more painfully than they enjoy gains.
"The idea is that you are rewarded for risk, so investors should embrace volatility."
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