New faces don’t solve old problems – why strategy also matters when it comes to investment trusts

After five years of miserable performance and with the shares trading at a 10% discount to net asset value (NAV), despite 20% of the share capital having been bought back, the directors of the Baillie Gifford Shin Nippon (LSE: BGS) trust have had enough. They have acknowledged the need for an immediate turnaround in performance and stated that if poor performance continues, they will explore “all available options”. This has been presumed to mean not just a tender for 15% of the share capital at a 2% discount in 2027, but also a possible change of manager and strategy.

In the last five years, the NAV has fallen 25% compared with a gain of 42% in the MSCI Japan Small Cap index, a 93% gain for the AVI Japan Opportunity Trust and 144% for Nippon Active Value. The question for BGS’s directors might be why they have been so slow to act. However, a study of precedents for changing managers and style is far from encouraging. The poster child for recent change was the switch in the management of Temple Bar from Investec Asset Management to Redwheel nearly five years ago. Since then, the investment return has been 148%, nearly twice the return of the All-Share index.

But the directors wisely decided that although they would change managers, the trust would continue to invest in “value” rather than “growth” stocks, even though the former had suffered terribly in the pandemic. Since then, value has far outperformed growth. It’s not obvious that the performance would have been too different had the previous manager, Alastair Mundy, been willing to continue to manage it.

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Other changes, although ostensibly maintaining continuity of style, have been less happy. In 2021, the directors of Genesis Emerging Markets, tiring of Genesis’s pedestrian performance, switched to Fidelity. The new managers sought to inject some fizz into the performance with a disastrously timed foray into Russia. To its credit, Fidelity has since performed much better, so although the five-year record remains poor, three- and one-year performance is now good.

The board of Mid Wynd appointed Lazard as managers in place of Artemis in 2023, perhaps believing that its lead manager, Simon Edelsten, was about to retire. But Edelsten has since re-emerged at Harwood, alongside his former co-manager Alex Illingworth. Mid Wynd’s board probably thought that Lazard’s growth strategy, supported by a solid record, would provide the shareholders with continuity. Instead, the trust has returned just 10% since Lazard’s’ appointment against 35% for the MSCI AC World index. Lazards appears to rely on an inflexible process, while Edelsten and Illingworth made use of insight and flair. The board should hand the management contract back to them.

Have other investment trusts fared better?

Boards that switched not just manager, but also style, have fared no better. Keystone was once managed by the investment arm of S.G. Warburg, investing in UK equities. It shifted to Invesco in 2017 and thence to Baillie Gifford in late 2020, adopting a high-growth global mandate under the new name, Keystone Positive Change. Baillie Gifford’s style fell out of favour soon after, and Keystone was unable to bounce back. It was wound up earlier this year.

Schroders struggled to replace Richard Buxton as manager of Schroder UK Growth when he left for Old Mutual in 2013. Five years later, the board tired of Schroders’ failure to replace him with a quality manager and switched managers to Baillie Gifford. This has not been a success and the trust has dramatically underperformed the All-Share index in the last five years, although only moderately over one and three years. Perhaps “UK Growth” is just a contradiction in terms; in any case, time is running out.

MIGO Opportunities Trust moved with its managers from Miton to Asset Value Investors, but its lead manager, Nick Greenwood, has now retired and AVI propose a change of focus. Instead of investing in undervalued trusts, AVI now proposes a narrower, “activist” approach, seeking to compel companies it invests in to do something about the discount at which their shares trade. But this approach is expensive, time-consuming and often unsuccessful. Moreover, the time for it may have passed. Two years ago, discounts to NAV were wide, performances had flagged, but an upturn was imminent. Opportunities were plentiful, as Saba Capital realised. Now they are much scarcer and riskier. Hopefully, MIGO will continue as before.

It’s not all bad news. Edinburgh Investment Trust has found a stable home at Majedie and generated solid returns, while the shareholders of STS Global Income & Growth seem happy with Troy’s low-risk, modest returns approach. Trust mergers have generally been successful. Internal changes of manager, such as regularly performed at JPMorgan, have a good record overall, as has the ratcheting up dividends.

A change of management company and style, however, has a poor record. A new style is adopted and management company appointed when it is riding the crest of a wave. Then, the market changes gear, the new managers struggle and don’t have the embedded goodwill from past performance to carry them through difficult times. What, then, should the Board of BGS do? They need to recognise that smaller companies have performed poorly the world over in recent years. In Japan, the growth style has been heavily out of favour, which is why BGS’s two value-orientated rivals have left BGS trailing in the dust.

Yet BGS’s performance has picked up in the last six months while Baillie Gifford Japan (LSE: BGFD) has had a good year. It looks as if the growth style is returning to favour; if so, there is nothing to be gained and much to be lost from BGS changing strategy now. BGS could merge with BGFD, as JPMorgan’s Japanese Smaller Companies Trust was merged with JPMorgan Japanese, but better, surely, to give Brian Lum, BGS’s new lead manager, a chance to prove himself.

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