Some investment trusts have delivered 50 successive years of annual dividend growth and a key component of that is the boards that oversee them.
Philip Remnant, chairman of the City of London Investment Trust, explains what an investment trust board does and why they matter.
An investment trust�s structure, its professional investment manager and its experienced independent board can deliver consistent performance
Investment trust companies were first created in 1868 as a way for those of modest means to invest in the opportunities available from the developing and expanding markets of the British Empire.
They were predominantly for small private investors and this remains the case today, with many private investors having held shares in long established investment trusts through many generations. Investment trusts are the oldest form of collective investment vehicle and, in the view of many commentators, the best.
I have the privilege to be chairman of one of these companies � The City of London Investment Trust plc. It started life in the late nineteenth century as a brewery company in the City of London and became an investment trust in 1932 when the brewery was sold, focusing predominantly on investing in the shares of companies listed on the London Stock Exchange.
This year, the company became the first investment trust to provide its shareholders with 50 successive years of annual dividend growth.
This provides compelling evidence that the combination of an investment trust�s structure, its professional investment manager and its experienced independent board can deliver consistent performance, notwithstanding the twists and turns of both the economy and the stock market.
Investment trusts are public companies like any other, with their shares traded on the London Stock Exchange. They have a fixed number of shares in issue, which are priced like all company shares according to supply and demand and they have an independent board of directors who govern all the activities of the company and, most importantly, oversee the appointed professional investment manager.
Investment trusts can be self-managed but they more usually appoint a third-party manager.
History shows that investment trusts tend to outperform other collective investment vehicles and this can be attributed to several significant features.
The ability to gear the portfolio and the compound effect of doing so is one of those features. Gearing involves borrowing money with the objective of earning a better return than the cost of that gearing. It is, of course, a double edged sword as it will enhance losses in falling markets.
The closed-ended structure of investment trusts is another of those characteristics. This, in particular, means that investment trust managers are not forced sellers of shares to fund redemption streams in stressed markets with the potential negative impact on portfolio performance. The discount or premium to the net asset value at which investment trust shares trade will narrow or widen according to market sentiment but any such discounts can offer good value.
The company structure also enables investment trusts to smooth and steadily grow dividend payments, and that is an important and a compelling attribute of investment trusts.
Each year an investment trust is permitted to retain up to 15 per cent of the income earned from its portfolio in its revenue reserve. This enables an investment trust to put money aside during the good years, so that in more challenging times when income levels may have fallen, dividends to shareholders can still be maintained or grown.
The City of London Investment Trust takes advantage of this, which helps to explain its remarkable achievement of 50 years of continuous dividend growth.
Perhaps the most important feature of investment trusts is the existence of an independent board, which provides a critical governance function and is independent of the appointed investment manager.
A good board usually consists of a broad range of directors with complementary skills, including investment management; business management, finance, risk and compliance; and sales and marketing.
The board constantly seeks to ensure that the investment trust is managed in the best interests of its shareholders and it does this by scrutinising the activities of the investment manager, challenging decisions made and taking whatever action it deems necessary to ensure that the interests of shareholders are protected.
The board also contributes its own collective wisdom to the thoughts and ideas of the investment manager, and works with the manager to ensure that the right strategy and policies are being followed. This helps the investment manager in his aim to outperform.
One very clear and tangible benefit of this has been the competitive management fees which many boards have negotiated for their shareholders. City of London enjoys the lowest ongoing charge in its sector, at 0.42 per cent, and this is one of the lowest in the investment trust industry.
Investment trusts have been the investment of choice for many investors for many generations and their attractions do not dim with time. Many factors contribute to their success but perhaps the most important of these, particularly in this increasingly regulated world of ours, is the role of the independent board acting as a constructive friend encouraging, advising, challenging and checking, always with one thought in mind � the best interests of shareholders.
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