We've drifted a long way from the 80s and 90s goals of a shareholding democracy, says Max King. A new investment trust aims to get us back on course.
In the 1980s and 1990s, "popular capitalism' and "a shareholding democracy" were stated objectives of the government. Politicians believed that companies in which large numbers of private individuals had direct shareholdings would be more publicly accountable and better managed than if owned by the government or a clique of City firms. Selling these firms off to the masses such as the "tell Sid" campaign to market British Gas shares enabled the government to kick start the process of privatisation, while low prices gave nervous investors a cushion against the risk of short-term paper losses if markets fell. It was hoped that investors would broaden their investments across the market once they had some profits under their belts.
However, the tide started to turn against popular capitalism with the 1997 election. The Labour party had always staunchly opposed privatisation but, in time, the Conservative party also came to see the Blairite corporatist policies as more "modern". Meanwhile, two savage bear markets in a single decade caused the public to lose its appetite for equity investment, even though the losses were subsequently more than recovered.
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Daniel Godfrey, the chief executive of The People's Trust, a new investment trust, wants to play a part in reviving popular capitalism and in breaking up the cosy cartel that governs corporate Britain. "The industry needs to be transformed to serve investors and society, not itself," he says. The trust, due to float on the stockmarket this month, will start small, with a target of raising £125m, but he hopes to grow it into a "big, mass-market fund" over time.
Serving the small investor better
After spells marketing investment trusts, first for Finsbury Asset Management, then for Flemings (now part of JP Morgan Asset Management), Godfrey became director-general of the Association of Investment Companies in 1998. The next 11 years saw a spirited marketing campaign to popularise investment trusts and the AIC successfully taking on the UK government in the European courts to reclaim for investors more than £300m of VAT wrongly charged on management fees. He later became chief executive of the Investment Association, the trade association for the UK investment management industry, but left in 2015, having fallen out with the big-wigs of the industry who thought he should be focused on their own narrow corporate interests rather than the interests of their clients and investors generally. So there is little doubt that he favours the small investor over the City establishment.
Godfrey says that a majority of investment assets are owned by ordinary people through their pension funds, but they are being short-changed by capital markets. Investors are shoe-horned into poorly performing investments by people who are too concerned about short-term volatility rather than "the only risk that matters permanent loss of capital", he says. "People have become hard-wired into being excessively risk averse, even though it's not in their best interests. The professionals in the industry, the regulators, the media and the government all pander to this, but the consequence will be miserable returns. People can't afford low returns given the amounts they save, but that is what they get, even though their time horizon enables a longer-term view." What's more, the best returns follow market shake-outs yet, discouraged by sensationalist media coverage, investors tend to sell out after stock prices have fallen when they should be buying. Retail investors give up 2% of returns each year through poor timing.
The People's Trust will aim to return 7% per year compounded over each rolling seven-year period. The directors have selected five fund managers from a list of 12 provided by investment consultants at Willis Towers Watson. The five managers, from Lansdowne, Artemis, JO Hambro, Comgest and First State Stewart, have been offered seven-year contracts in their areas respectively clean energy, UK smaller companies, Europe, global equities and Asia. These choices reflect convictions about the managers rather than "a pre-conceived emotional attachment" to their area of specialisation.
Godfrey says he follows the Warren Buffett dictum of "only invest in companies you would be willing to hold for ten years", so the managers have been chosen for their long-term approach. Comgest, for example, is happy to follow companies for up to four years before investing, while First State Stewart has a long-established reputation for its focus on sustainable growth.
Aiming for absolute returns
The result is a portfolio of about 130 stocks with low exposure to the US, Japan, commodities and financials. Over 30% of the fund will be invested in industrials but this sector nowadays includes services as well as manufacturing. Much of the "clean energy" portfolio falls into this sector as the remit extends well beyond wind and solar to companies working to improve energy efficiency.
The portfolio is heavily skewed away from the global indices by sector and geography but Godfrey emphasises that performance will be measured in absolute terms rather than relative to market indices. "This is a bet on great companies producing great returns over seven years," he says. His job, in conjunction with the non-executive directors and Willis Towers Watson, is to choose good managers and monitor their performance, not to directly manage the investments.
Total costs will be a little over 1% per annum initially, but should fall as the trust grows. Launch costs are estimated at 1.3%. The trust has similarities with Alliance Trust and Witan, both of which invest globally and also employ Willis Towers Watson as advisers, though Godfrey emphasises a longer time-frame and an objective of attracting new investors currently earning near-zero returns in bank accounts. "It's not perfect," he says, "but it can only get better as it gets bigger."
What makes the trust deserve support is not so much the initial investment proposition, but the objective of drawing back into equity investment those who have been discouraged in the last two decades, by offering attractive long-term returns. Godfrey has big ambitions for what will initially be a modest-sized fund but, as Lao Tzu said, "a journey of 1,000 miles begins with a single step". Britain needs a stockmarket for the many, not the few.
How does The People's Trust stack up?
Last month, I gave a friend a list of the things that make a good fund manager, says Merryn Somerset Webb. These included: 1) having an all-inclusive fee one that incorporated even trading costs. 2) An annual meeting to which all individual investors are invited. 3) A concentrated, high-conviction portfolio. 4) A stepped fee, falling as the fund rises in size. 5) A clear investing style that does not change constantly. 6) Skin in the game the manager having their own money in the fund. 7) An understanding of the long-term role of the fund manager as a steward of the corporate world and of national social cohesion. 8) An active share of over 90% this just means it doesn't track an index. 9) A willingness to turn up at AGMs and vote down silly pay packages.
Check The People's Trust against this list and you will get a lot of ticks. However, Daniel Godfrey's key obsession is time. Most fund managers are semi-hysterical about their relationship with whatever index they have chosen to be judged against. This makes no investing sense: if you can't look at an investment in a five-year context you aren't investing, you are speculating. That's why the five fund management firms among which the trust will divide its investors' cash are being put on seven-year contracts. None of them will have to worry about short-term returns.
The People's Trust isn't perfect and neither is another interesting new fund, a global fund called the CF Blue Whale Growth Fund, backed by Peter Hargreaves and managed by Stephen Yiu, that will launch this month. In both cases, their costs will be too high to make me happy until they grow. And you could argue that neither of them offers a dramatic enough difference to the status quo to challenge the industry as it needs challenging.
However, they represent a dawning recognition inside fund management that the current attitude to investment still isn't good enough. We must count that as progress.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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