Investment trusts date back to the 19th century, when the F&C Investment Trust was launched in 1868. There are 23 investment trusts that have been around for over a hundred years, surviving both world wars, the Spanish flu pandemic and many market crashes. Michael Born, Senior Investment Analyst at EQ Investors, offers Finance Monthly an in-depth look at what these investment trusts have to offer.
What are investment trusts?
Unlike open-ended funds, investment trusts are listed companies, and are traded on stock exchanges like the London Stock Exchange (LSE). ‘Closed-ended’ structures are so-called as the number of outstanding shares is fixed, unlike in an open-ended product which requires that investors can tender (redeem) their shares to the manager in order to get their cash back on a daily basis, so the number of shares changes from day-to-day.
Instead of trading with the fund manager, investors in investment trusts will trade with each other throughout the day. This means that the “price” of an investment trust can float independently of its net asset value (“NAV”) the fair valuation of the shares underlying value.
Buying portfolios at a discount
When investment trust prices move above the NAV (as investors clamour for shares, and demand outweighs supply) the trust is said to be on a “premium”, and when the price is below the NAV, a discount.
One of the key advantages for investment trust investors here is the potential to buy a portfolio at a discount, and then sell at a premium, which adds to investors’ returns. However, a negative swing in sentiment can exaggerate losses through down markets and if we are in an environment where most investment trusts are on a premium, this means that investors will have to pay over the odds for popular strategies.
As with most types of investing, it pays to be patient and wait for opportunities.
One of the key advantages for investment trust investors here is the potential to buy a portfolio at a discount, and then sell at a premium, which adds to investors’ returns.
Intraday trading
Whilst open-ended funds offer investors liquidity on a daily basis, as investment trusts are listed companies, investors can trade in and out at any point when the LSE is open. This allows investors to reposition their portfolios in response to real time newsflow, whilst open-ended investors have to wait for their books to clear.
Not constrained by liquidity
As the managers of an investment trust are not bound to offer investors daily liquidity, they can invest in assets which are not manageable in an open-ended strategy, like assets which are not publicly traded such as property, infrastructure and private equity. These investments, which do not have “mark-to-market” risk (when values are determined by supply and demand on the open market) add considerable diversification benefit as they will not necessarily fall on bad news.
In addition to being able to invest in less liquid assets, managers of investment trusts do not have to hold a cash buffer to manage liquidity, which is essential if you have flows in and out of the product on a daily basis, so the cash “drag” resulting from the portfolio not being fully invested is minimised. Similarly, there is no obligation for managers to sell assets at unfavourable prices to provide daily liquidity.
Gearing
One of the unique features of investment trusts is the ability to gear the shares, where trusts borrow debt and then leverage their returns. Although this certainly increases the potential for upside, losses can also be magnified by gearing, and one of the attributes of a manager is their ability to know when to deploy debt.
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Corporate governance
Legally, investment trusts are required to have a board who oversee the investment manager as well as interacting with shareholders via the annual general meeting (AGM). The board has the ability to fire and replace the manager if they determine the company is not being run in the interests of shareholders (e.g. for poor performance) in addition to making key decisions on strategic areas like share buybacks (to tighten the discount) and dividend policy. As a listed company, there is a higher burden of disclosure required for investment trusts as compared to their open-ended cousins.
A constrained universe
Like stocks, investment trusts must go through an IPO process, so the costs of bringing a product to market are considerably higher than for the open-ended space, which results in a much smaller universe. Many sectors only offer 4-5 choices with regard to strategy or manager and there are strategies which are not covered at all by the investment trust market. This also means that it is not possible to deploy large amounts of money in the investment trust space, as the premium would be driven up significantly. This is one of the main reasons that the investment trust market remains niche and is often overlooked by institutions.
Relative value opportunities
There are several managers who run both investment trust and open-ended versions of their products, which provides investors with the opportunity to choose between the two, as well as trade them if valuation opportunities open-up. However, investors should also be aware of the differences between “versions”.
Although strategies may be run pari-passu (side-by-side), the freedom of the manager from liquidity constraints can often result in the investment trusts running a longer tail and being closer to the manager’s “ideal” portfolio.
Consolidating and standardising processes delivers benefits such as improved operational efficiencies and reduced administrative costs. But as well as improving efficiency, sharing resources also creates valuable opportunities for revenue growth. Tim Vine, Global European Head of Finance & Risk Solutions at commercial data and analytics firms Dun & Bradstreet, explains how this beneficial coordination can be achieved.
Although finance shared services are often the focus during challenging times to reduce cost or outsource operations, businesses can deliver operational efficiencies and increased productivity by moving to a shared service model.
Historically, “back office” finance functions have not been seen as growth drivers or sources of innovation. However, there is huge potential to transform the management of processes such as invoice-to-cash processes and deliver significant value to the business, rather than just being seen as a function where costs can be cut.
Steps to Implementing Finance Shared Services
To create an effective shared model, there are three recommended steps to help deliver maximum value and tangible results for the business, regardless of company size or industry.
- Define. Before embarking on the implementation of a finance shared services model it’s important to ask some key questions to ensure you have well defined the business goals and desired outcome. Things to consider include asking internal (and external) stakeholders what processes are considered suboptimal or are incurring significant cost to the business. It’s also important to have full visibility of any duplication and type of tasks completed manually vs. automated processes.
- Analyse. Conducting a full analysis of your current processes is also important, as well as benchmarking them against best practices. Assessing the ‘current state’ will allow you to examine where improvements can be delivered by introducing a more centralised and standardised approach. It’s important to validate this analysis both internally and externally and seek the support required for successful implementation.
- Measure. When considering a finance shared service model, it’s important to understand your current costs, structure and processes to help measure your performance against recognised best practice and measure any improvements. If you operate across multiple locations or have siloed teams then processes may be duplicative, too decentralised or too manual. If your infrastructure is fragmented there is unlikely to be much successful information sharing taking place. Establishing a robust governance model will be key to addressing any deficiencies, ensuring a central point of control and creating synergies.
When considering a finance shared service model, it’s important to understand your current costs, structure and processes to help measure your performance against recognised best practice and measure any improvements.
Gap Analysis
Once you have evaluated the current situation and collected feedback from various parties, further analysis is required to inform the implementation strategy. This analysis will identify any gaps between what is actually being completed versus what people believe or perceive is being delivered. Bridging these gaps between actual performance and best practices will help you establish what needs to be done to drive improvement, reduce cost and create opportunity for growth. Gap analysis is a good way to manage expectations and provide evidence to key stakeholders on what a shared services model can deliver.
Scaling Shared Services
Best-practice governance models help finance teams gather the right information for each market a business operates in to understand the legislative landscape and identify similarities (and differences) between countries or region. Where legislation is similar, there is an opportunity for a more centralised and standardised structure.
Global policies can bridge gaps across business segments, units, markets, and regions and drives consistency across finance operations planning. To perform in the most efficient way, you can scale processes so that it doesn’t matter where the teams are based. Processes from credit, collections, billing, dispute management, disbursement, or transactional accounting can be managed consistently around the world.
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Auditing Technology
To support effective implementation, it’s important to have a full view of all the systems used across the business including customer relationship management (CRM) system, general ledger platform, collections management, enterprise data management (EDM) and a business intelligence (BI) or reporting tools. A technology audit can reveal which solutions should be kept, which have global capabilities, and which are potentially no longer required. Crucially, an audit can identify which systems should be integrated or combined across functions.
The End Game: Finance Shared Services
Initiating change and gaining buy-in from decision-makers can be challenging, especially if the change impacts people and resources. The steps outlined are designed to help with the successful implementation of a finance shared services model, to increase efficiency, reduce costs, but perhaps most importantly to add value for the business and its clients.
A report from MHA MacIntyre Hudson and Charity Finance Group based on a survey of over 120 trustees has raised concerns about complacency on financial governance within charities.
57% of respondents said that they understood strategic financial governance matters well or very well, with only 12% saying that they had a poor or inadequate understanding. This is very positive and indicates that boards are taking financial matters seriously.
Yet 84% of respondents said that it would be beneficial for their charity to have a better understanding of strategic financial governance matters.
This could be linked to the fact that only 16% of respondents always assessed board competency for charity finance skills, with 28% assessing skills sometimes and 30% occasionally. This was compounded by the fact that 47% of respondents never or only occasionally assessed the effectiveness of their financial governance.
Other interesting findings were:
- Only 22% of charities indicated that they always made available charity finance training for trustees that needed it.
- Less than one in five respondents considered that they had the complete skills and knowledge required to fulfil their responsibilities.
- 49% of respondents said that they had used the latest Charity Commission guidance on charity finance.
Commenting on the findings of this report, Sudhir Singh, Partner and Head of Not for Profit, MHA MacIntyre Hudson said: “Strong financial governance is a major contributor to successful and effective charities, so whilst we don’t want to be overly critical of the good intentions of most trustees and charities, it is difficult to escape the very clear conclusion that many people just need to do better.
Andrew O’Brien, Director of Policy and Engagement, Charity Finance Group said: “This report is an important wake up call for the charity trustees and executive teams. Every charity should be regularly assessing its skills and understanding at board level to ensure that it has the ability to govern itself financially. There are lots of resources out there, but charities need to make a commitment to using them Complacency is simply not an option.”
(Source: MHA MacIntyre Hudson)
Cornelia Ritz Bossicard is the Founder and Managing Partner of 2bridge AG - a sparring partner for corporate governance with the aim to build bridges between stakeholders. She serves on a variety of Boards of multinational companies and chairs the Audit Committee of a retail and food company listed on the Swiss stock exchange.
Prior to founding 2bridge AG, Cornelia had worked as an auditor and senior advisor with one of the Big Four accounting firms, both in Switzerland and the Silicon Valley. Cornelia has over 22 years of international experience as Director and senior advisor to executives and board members of companies ranging from start-ups to multibillion-dollar multinationals in the technology, industrial products, retail and consumer, wholesale, and professional services industries. Finance Monthly speaks to her about her company 2bridge AG and current trends in corporate governance.
Can you tell us a bit about 2bridge AG?
2bridge AG is a sparring partner for corporate governance with the aim to build bridges between stakeholders.
On the one hand, we act as independent sparring partner for investors, board members and executive management, on the other hand we passionately share our experience through lectures and workshops.
2bridge AG is based in Switzerland and focuses on companies in industries where we have extensive international experience, namely technology, retail and wholesale, food, industrial production, and professional services.
What do you mean by “sparring partner for corporate governance”?
Most of the investors, board members and executives I work with are well educated on corporate governance and have lead companies successfully in the past. My role is to support them navigate through the maze of information and options, help align stakeholder interests and provide them with an independent point of view on how to tailor their organizations’ corporate governance to the changing environment and to stay fit for the future.
What’s the history behind 2bridge AG?
Building bridges has always been one of my passions. I contemplated studying civil engineering to build bridges between valleys, but then decided to study business administration to build bridges between people.
Two years ago, I decided to realize my entrepreneurial aspirations and to set up my own company. The name, 2bridge reflects well what is important to me and my conviction in companies performing better when people work together towards a common goal.
Can you share some trends you see in corporate governance?
It is becoming more complex for investors, boards of directors, and executives to stay agile in the market and navigate their organizations through uncertain and dynamic times.
Today, tried-and-tested business models are suddenly disrupted; markets and competition are becoming more digital and global.
For example, Artificial intelligence (AI) as 'predicting machines' coupled with human judgment will lead to quicker and smarter decision making at a lower cost. It is not a question if AI tools will enable enhanced performance against strategy and lead to a change in strategy, but when they will do so and to what extent.
As a result, new skills and a more dynamic and iterative strategy and risk management process are required.
Good corporate governance becomes increasingly important for building trust. It is not only important what companies do but also why and how they do it. As studies show, trust drives value and investment decisions. Therefore investors and other stakeholders do pay more attention to corporate governance.
Corporate governance is sometimes perceived to be limited to compliance, as there is a number of applicable legislation, regulation, voluntary commitments and business practices. I often hear from board members that most time is spent on compliance matters and that there is not much room for strategy and other important discussions. Compliance is important, but it is the role of the chair to set a balanced agenda to mitigate risks and take advantage of opportunities.
How has your former auditor’s background prepared you for your current role?
My years as Audit Director and Senior Advisor with one of the Big Four accounting firms have taught me the importance of being a sparring partner and trusted advisor to my clients. Over the years, I gained extensive experience in financial reporting, mergers and acquisitions, risk management, financing, audits and corporate governance. In addition to my financial expertise, I built a broad, global retail, technology and industrial experience, international market know how and strive to continuously learn and improve.
As Henry Ford said, ‘Coming together is the beginning; keeping together is progress; working together is success.’
Contact details:
Website: www.2bridge.partners
Email: info@2bridge.partners
This week Finance Monthly has heard from Rob Haslingden, Head of Product Marketing & Propositions at Experian UK&Ireland, who gives us an overview of global credit scoring, the right attitudes, and the evaluation of data management and governance controls.
Some industry commentators have suggested that Open Banking is a death-knell for credit scores. After all, why do you need a credit score, if you have 12 months of transactional behaviour for a customer?
This is a curious observation, some of which is based on a misconception that Credit Reference Agencies (CRAs) see the sharing of transaction data as a threat and not an opportunity.
There’s also the assumption that because credit data is a reciprocal arrangement that somehow credit providers will not be motivated to share credit data in a lending environment, where current account information is freely available.
At the heart of this discussion is the question of what additional value CRAs and other providers can add to transactional analysis that helps both lenders and customers?
Credit scoring, then, now, and in the future
Originally credit scoring was based on historic financial behaviour, in particular the consumption of credit. More recently it has included an assessment of a customer’s current circumstances which has been based on banks sharing summarised current account behaviour. Future analysis will assess a customer’s financial circumstances based on a mix of credit and detailed transactional behaviour.
Real-time analysis of transactional data will enable the provision of scoring that can more accurately reflect a change in an individual’s personal circumstances now, and in the future. This can provide organisations with a more sensitive and timely measure of a customer’s financial status.
Suddenly we enter a world where credit scores and transactional data become the data components of a new scoring regime focused on measuring affordability.
The sharing of the current account data mandated by the Competitions and Market Authority (CMA) provides an opportunity to deliver a more accurate and timely assessment of customers’ financial well-being throughout the life of a loan. It holds the promise of delivering a better and more informed view of an individual or business’ suitability for products.
Data sharing will not only provide a measure of ‘affordability to purchase’, but may soon also provide a measure of the ‘affordability to live’.
While Open Banking won’t be in force until 2018, it is important for organisations to consider how they can prepare now. Whilst there are some technical and functional changes that are essential, some areas simply reinforce the basics of a good operational and customer centric strategy.
Areas to consider a strong focus on now are:
Avoid disintermediation
Four out of ten customers express decreased dependence on the bank as their primary source of financial services, according to EY. If banks become less relevant to customers they run the risk of becoming ‘utilities’, leaving the door open for competitors to deliver more satisfying and engaging customer experiences.
To be successful in the world of Open Banking, organisations must ensure they put the customer at the heart of their business and create personalised services that are relevant to people’s everyday lives. Providing services that extend beyond those traditionally offered is a great way of broadening engagement and adding value. Working collaboratively or in partnership with Fintech to develop better online services is another.
Build trust and confidence
To realise the aspiration of increased competition, people must have the confidence to share their data. Organisations that seek to capitalise on the opportunity of data sharing must acknowledge their collective dependency to act responsibly. Customer perception is that banks are generally very secure. This puts established providers at a distinct advantage when asking their customers to share their transactional data.
Established banks will be keen to ensure this reputation is not undermined in the drive to open up the market and increase competition. New market entrants must find ways to build customer confidence in ways that can win the hearts and minds of customers. Being honest about the purpose for which you require data is essential. Those that remain true to their brand purpose and reflect this in their engagement with customers throughout the data sharing experience are those that will be most successful in securing customer confidence.
Leverage your brand
Brand can be a significant differentiator, particularly in a highly competitive market. Understanding how to leverage the brand to acquire customers is the key to success. Organisations with the strongest brands can capitalise on their equity where issues of trust and security will be key differentiators in getting customers to share their data.
Research confirms that those organisations who provide competitive pricing and excellent customer service are the ones that engender the most loyalty from customers. For younger age groups, the issue of brand is one of the highest factors in driving engagement, whilst the importance of customer service increases with age, Experian found.
New market entrants will have to rely on the excellence of customer experience to quickly build brand reputation and gain the trust of customers – and appeal through advertising as a means to attract and acquire.
Improve your data management
Open Banking may add to the overall confusion of ‘data’; what it means and what it is. People are concerned about the issues of data privacy, identity theft, and fraud that data sharing brings; few understand the benefits that may come as a result.
Organisations need to educate customers and emphasise the benefits of data sharing in order to gain customer trust and confidence. Organisations have a duty of care to limit the use of the data to the purpose for which the customer gives consent. Clarity and transparency are vital to securing this consent, as is the customers’ right to opt-out of data sharing. Terms and conditions for products must be simplified, and tools given that enable individuals to control and manage access to their data at any point. Failure to recognise this and abuse trust will undermine Open Banking, breach data protection and make organisations non-compliant.
Re-examine your governance model
Failing to deliver a great customer experience in a world of digital data exchange will undermine a brand and damage the business. Customers need to know who they can turn to when things go wrong.
Everyone involved in the data sharing ecosystem needs to ensure they have well-honed processes in place for resolving customer complaints quickly. Start developing your customer service model for data sharing now, and develop your scenario planning for how to deal with queries and complaints. Speed of response and commitment to customer care will be significant differentiators in a system driven by the sharing of personal information. Organisations need to focus on earning trust by doing the right thing for the customer and providing excellent customer service.
What does the future hold?
As Open Banking becomes a reality in 2018, so does the opportunity to create truly innovative services that can change the way banks interact with customers.
As with any new regime, or transformation, the future will write itself as time goes by, but there are certain elements that Open Banking will inevitably influence. These include identity verification, product comparison, better personal financial management, consent management, and risk forecasting.
Open Banking is a watershed moment in the relationship between customers and financial service providers. It creates a unique opportunity for everyone involved in the provision of services to increase relevance and trust by focusing on products that create value and improve the quality of people’s lives – predicated on the intelligent and compliant use of personal data.
Creating relationships that are transparent, honest and fair, and that enable customers’ to feel confident and secure in the knowledge that their well-being is a priority and privacy safeguarded, is what we believe is the key to creating meaningful, long-term relations that will revolutionise the way products are consumed.
In the window of opportunity between the announcement of the CMA’s remedies for retail banking and deadline for implementation, Open Banking mandated organisations should focus their efforts on building an infrastructure that supports change and generates value for customers.
Longer term, organisations should be looking to create services that are secure, engaging and personalised that deliver real-value from the intelligent use of personal data.
