Investing in good, reliable funds is essential if you want to grow your wealth, but have you ever considered putting money into the investment management businesses behind these funds as well?
A handful of investment trusts do just that - investing in a portfolio of shares their managers think will do well alongside a stake in the fund management company that employs them.
The logic of this arrangement is that fund management can be a very lucrative business when stock markets are rising and investors are keen to part with their cash. Why not get a piece of the action?
The best exponent of this strategy is Lindsell Train (LTI). This £172 million investment trust encompasses a concentrated portfolio of global consumer brands run by star fund manager Nick Train alongside a 24% stake in Lindsell Train Limited, the private fund management company he founded with Japan fund manager Michael Lindsell.
Established in 2000, the fund management company has turned out to be a great investment, turbo-charging Lindsell Train’s performance and making it the best performing fund in the country with a stunning ten-year total shareholder return of 472%.
Concerns have grown, however, over the investment trust’s reliance on its unlisted holding in the management company, which accounts for over a third of its assets.
Investor excitement at the jewel in Lindsell Train’s crown has formed a speculative bubble around the shares. Last year as the company entered the FTSE All-Share index for the first time, the shares soared 61% and at one point stood at an eye-watering 70% premium to their net asset value (NAV). The premium has since subsided to 24%, but still leaves it over valued and at risk of a nasty crash if stock markets retreat or Train's investment style falls out of favour.
This summer its chairman Julian Cazalet warned the stock rating was unsustainable. ’On that basis, I repeat again my warnings to any new shareholders who buy shares on an elevated premium to NAV. The company could be especially susceptible to materially declining stock market values.’
So if Lindsell Train is too hot to handle, where else can you find funds trying to apply its magic recipe?
Sanditon (SIT) investment trust is a good place to start if you are concerned that stock markets are over-valued and due a correction. Founded in 2014 by former Cazenove fund managers Tim Russell and Chris Rice, who were joined by former colleague Julie Dean the following year, Sanditon offers a defensive portfolio of UK shares and a 20% stake in Sanditon Asset Management, which the trio own.
It has had a slow start with the shares at 92p, down from 100p at launch and valuing the company at just £46 million. Performance and the fund management business have been held back by the managers’ belief that markets will crash once the Bank of England withdraws the quantitative easing (QE) polices that have propelled asset prices since the 2008 financial crisis.
‘We hope that a retreat in equity markets will lead to an improvement in relative performance which in turn should be a precursor to improved investment flows,’ Russell told investors recently.
If you think a market retrenchment could signal a recovery for Sanditon, the shares are a bit of a bargain on a 5% discount. However, like all these fund manager funds, their heightened exposure to stock markets makes them riskier than other investments.
A more established alternative is Majedie Investments (MAJE), a £154 million global investment trust established in 1985 to look after the wealth of the Barlow family after it sold rubber plantations in Malaysia. Barlow family members still own 52% of Majedie but the shares are of interest to other investors because of their stakes in the funds and business of Majedie Asset Management (MAM), which was founded by a talented team of fund managers from Mercury Asset Management and Merrill Lynch. Just over 27% of the trust’s assets are tied up in a 17% stake in MAM.
Uncertainty over whether Aviva (AV), the FTSE 100 pensions group, would sell its 13% stake in Majedie hurt the shares last year. Aviva has since confirmed it means to hold on and the shares have begun to rally. Although its five-year shareholder return of 125% is still below the Global sector average of 144%, the dividends are well covered and yield 3.3%. On a 10% discount to net asset value, the shares look good value too.
Two variations on the theme are worth noting. Gresham House (GHE) dropped its investment trust status in 2014 to become a platform for fund managers of ‘alternative’ assets in private equity, forestry and infrastructure. This is an area that ambitious chief executive Tony Dalwood believes is poised to blossom as local authority pension schemes diversify their investments. Listed on the Alternative Investment Market, the £50 million company is backed by Sir Damon Buffini, chair of the government’s ‘Patient Capital’ review, and expects to declare its first annual profit in 2018. Gresham shares are up 17% this year.
If that whets your appetite, you could also consider Tetragon Financial Group (TFG), a £916 million company founded by veteran hedge fund managers Paddy Dear and Reade Griffith. Over five years it has returned 146% to shareholders through specialist investments in credit, property and the TFG Asset Management platform. The shares trade at a huge 37% discount to net asset value, reflecting investor wariness to a specialist, dollar-denominated fund with its main listing in Amsterdam.
A version of this article was first published this weekend in the Telegraph