What are the benefits of EP Global Opps becoming a self-managed investment trust?

EP Global Opportunities has left investors awaiting details about its rationale for adopting the increasingly rare self-managed investment trust structure as its board prepares to remove Franklin Templeton as its third-party manager.

The Association of Investment Companies defines self-managed as where the manager is an employee of the investment company rather than an asset manager. Notable examples include RIT Capital Partners and Witan, which collectively run billions of pounds in assets under management.

“At one stage, they were absolutely a feature of the investment trusts sector however, they’re relatively rare these days,” says Winterflood Investment Trusts head of research Simon Elliott.

Elliott attributes the move away from the self-managed model to poor performance from the likes of Alliance Trust and Scottish Investment Trust, which prompts the board to seek alternative investment management arrangements. Beauty parades conducted by boards then inevitably attract third-party managers because of the infrastructure required to build up a self-managed model.

See also: Value trust sticks with Sandy Nairn despite ending Franklin Templeton arrangement

Alliance Trust and Personal Assets transition away from self-managed model

There are currently just 13 investment trusts in the AIC universe that adopt the model, according to Morningstar data compiled by the trade body. That compares to a total 493 investment trusts in the universe.

Self-managed investment trusts in the AIC universe

One of those is the £590.7m Scottish Investment Trust, which is due to be merged into the £505m JP Morgan Global Growth & Income investment trust, pending shareholder approval. Additionally, the direct lending investment trust, SME Credit Realisation, is currently in wind down.

Nine self-managed investment trusts have liquidated or moved to a third-party manager in the last five years, according to the AIC data.

Notably, Alliance Trust moved its management to Willis Towers Watson in April 2017, following a shareholder revolt instigated by Elliott Partners and a strategic review, while Troy Asset Management transitioned from investment adviser to the third-party manager for the Personal Assets Trust in May 2020.

Alliance Trust confirmed the direct cost of transitioning the global equity portfolio from Alliance Trust Investments, the old in-house manager which was sold to Liontrust, was lower than expected at 18bps. The modest increase in the trust’s admin expenses were “more than offset by investment performance”, a spokesperson said.

Personal Assets transitioned away from the self-managed model with the £1.2m sale of its subsidiary PATAC, which was AIFM and administrator of the trust. A regulatory filing at the time stated the way the portfolio was run would not change and a spokesperson said costs have remained the same for shareholders since the change.

In fact, self-managed investment trusts have a reputation of lower costs, according to Elliott.

For example, at the Independent Investment Trust, former Baillie Gifford manager Max Ward is paid £200,000 to manage a £341m portfolio. Ward is accompanied by one other employee at the investment trust, an office manager.

The EP Global Opportunities expense ratio is set to come down as a result of going down the self-managed route, Elliott says.

See also: ‘Sad day’ as board seeks end to historic £600m Scottish Investment Trust

Investors await details on EP Global Opportunities 

Despite the move to a self-managed model, Sandy Nairn will continue to manage the £101m EP Global Opportunities trust from Franklin Templeton, which will be sub-advised to manage 70% of the portfolio.

Elliott has met with Nairn since the announcement but says he will be waiting for more detail in the circular to determine what can be achieved under the self-managed model that was not achievable under the current investment management arrangements with Franklin Templeton.

“I think the idea is that once they’ve got the circular out there, the nuts and bolts of the deal, then Sandy will come around to explain to people how he sees the portfolio developing in future.”

Elliott notes Nairn currently has 29.5% in cash and fixed income and currently views global markets as very overheated. He will be interested to see how Nairn plans to allocate to private companies and third-party managers, although both those activities are allowed in the current arrangement. The investment trust’s largest position is currently 6.4% allocated to Templeton European Long-Short Equity SIF.

Premier Miton’s Charlotte Cuthbertson (pictured), who co-manages Miton Global Opportunities with Nick Greenwood, notes the market was “underwhelmed” by the move at EP Global Opportunities when it was announced at the end of October.

“The trust has been an underperformer for some time and the move to self-directed leaves the existing regime in charge,” Cuthbertson says.

The closed-ended fund currently trades at a discount of 11.17% compared to a 12-month average discount of 9.42%, according to Hargreaves Lansdown data. That’s despite the fact that shareholders who are uninterested in sticking by the trust if it transfers to a self-managed model would be able to exit at net asset value as part of a tender offer.

Scale is important for the self-managed model

QuotedData head of investment companies James Carthew reckons the size of EP Global Opportunities makes its decision to turn to the self-managed model unusual.

The £2.5bn Caledonia and £4.7bn RIT Capital investment trusts have the scale to manage their own portfolios, Carthew says. They too still tap into the expertise of external managers as EP Global Opportunities intends to do.

“While self-managed, EP Global will still be bound up with the same management company and individual manager that it had previously,” he says. “However, as the fund shrinks, the capacity to cover markets effectively as a self-managed trust could become disproportionately expensive.”

Nevertheless, he points out the small and simply-named Investment Company, which has net assets of just £16.3m, flirted with third-party managers Miton and then Fiske only to bring control over the portfolio back in house in November 2020.

Pros and cons of the self-managed investment trust model

Cuthbertson reckons there are pros and cons to the self-managed model. Although changing managers on a self-managed investment trust is more challenging, she says the oversight of the investment function can be much higher.

Elliott notes costs are often lower on self-managed investment trusts and the teams behind the trust often have “skin in the game”. He points to Max Ward at the Independent investment trust as an example with the former Baillie Gifford manager holding a 5.5% stake, based on the trust’s last annual report. That is true too of Sandy Nairn at EP Global Opportunities, who owns 9.2%.

The breadth of the investment team was noted as part of the rationale behind the Scottish Investment Trust moving to a third-party arrangement. But Elliott notes “if that was everything, then there wouldn’t be any smaller niche boutique asset managers out there, which, of course, there are”.

But Tilney managing director Jason Hollands says the self-managed model is now an outlier as governance of investment trusts improves.

“If a trust owns its own fund management operation, there is clearly a potential conflict of interest as few groups are likely to be best-in-class across multiple asset classes, the board has equity in the inhouse managers and ultimately they can stand accused of being referees who are also playing for a team,” says Hollands.

The majority of self-managed investment trust boards should be independent, although non-independent executive directors tend to be present, notes Carthew.

Nevertheless, Hollands says self-managed trusts are not inevitably inferior when it comes to delivering returns. He says the approaches of RIT Capital and Witan, which substantially outsource large components of the portfolio to external managers, significantly addresses issues arounds governance because the board can still change managers and is free to seek external counsel to inform their decision making. “This model has worked very well for RIT in particular, where the Rothschild family remain cornerstone investors and are represented in the board.”