Working to level a shifting playing field

Daniel Godfrey has been director general of the Association of Investment Trust Companies since 1998. Before joining the AITC, he worked in a number of roles at companies including Schroders and Laurentian, and more recently as marketing director at Fleming Investment Trust Management. His previous work included dealing with a broad range of investments such as life and pension products.

Q: What are the main roles of the Association of Investment Trust Companies?

A: There are three broad areas of activity. The first is within the public affairs area – watching what is coming down the pipe and trying to make sure it doesn’t hurt us. We also proactively aim to get things changed where it would be an advantage to the investment trust shareholder, to create a better playing field from which trusts can deliver returns to shareholders.

The second area is working with boards of investment trusts to provide them with tools and training that they can use to improve their ability to deliver returns to shareholders. The last area includes information, education and promotion – that is, trying to make the world more aware of investment trusts and what they can do for investors and advisers.

Q: What were the big issues for the AITC in 2004?

A: In public affairs, the main areas were providing help and assistance to the Financial Services Authority in achieving a resolution to the split-capital crisis, and working on a case against HM Customs and Excise on VAT that is due to be heard in May. This case is important because if we win it is worth tens of millions of pounds a year to investment trusts. We have also been working on international accounting standards, which are coming into force in January. We were able to resolve a lot of wrinkles – some of which were potentially quite dangerous for some investment trusts.

Elsewhere, we issued an update to the corporate governance code and a number of guides: board self-evaluation, evaluation of fund managers and getting the best out of your corporate broker. It has also been the first year of our director training courses, and these have been very successful.

On the information side, we have done a lot of work on child trust funds and more generally have introduced broader and deeper information availability through our website.

Q: What is the AITC’s position on the VAT issue?

A: There is a European directive that says special investment funds, as defined by member states, shall be exempt from VAT. The government has chosen to define unit trusts and Oeics as special investment funds, but not investment trusts. The crux of the argument is that it may have the discretion to define what is a special investment fund, but it has to use that discretion applying reasonable criteria.

We argue there is a principle of fiscal neutrality where you cannot benefit one product against another through tax, and that has been breached here. Consumers will tend to choose an investment trust or a unit trust, and don’t regard them as chalk and cheese. Both pool investors’ money into a diversified portfolio in the hope that it will go up in value and provide an income, and so this is an unreasonable use of the government’s discretion. The issue will be put in front of a VAT tribunal in May 2005.

Q: The split-cap problem has underlined the need to educate investors on the risk/reward profile and nature of gearing in investment trusts. How involved has the AITC been in addressing this?

A: There is now more information on our website on split-caps, and transparency is important. We are also running courses for financial advisers to improve their understanding of gearing. In our conduct of business rules, there is a requirement that investment trusts that have high levels of gearing must provide separate warnings to the investor through the intermediary and in the key features document.

Q: What is your reaction to the £194m split-cap compensation package announced by the FSA?

A: It is the end of a chapter, but not the end of the story. The FSA has put the consumer first in doing the deal, and should be applauded for that. As a result, zero-dividend preference shareholders will receive a fairly decent chunk of their money back, although not everything. There are still issues to resolve regarding those companies not involved in the deal, but a significant number of investors can now begin the process of claiming compensation.

Q: Some investment trust companies are incorporating new structural devices, including performance fees and discount control mechanisms. Does the AITC offer advice to boards on these devices?

A: The role has been to ensure that boards at least ask themselves whether they need to have performance fees, discount control mechanisms or any other devices. We need to make sure they face up to all the issues. There isn’t a one-size-fits-all solution, but boards need to ask intelligent questions and we try to make sure they don’t omit any important issues, and that possible structures don’t have negative side-effects and are clear and transparent.

Q: Investment in investment trust companies is shifting from institutional to retail investors. What is driving this?

A: It doesn’t make sense in the long term for an institution to own an investment trust that has a mandate it can manage itself. But there are highly specialised investment trusts that for most institutions would be sensible to invest in as a proxy to a market they can’t access themselves.

Q: Is this shift an issue for the industry?

A: We are getting towards 50/50, but it probably needs to be 70/30 in favour of retail. It will take some time and is an issue because it comes into the equation that brings in discount volatility. You have to play the cards you are dealt – you can’t flick a switch and change it all overnight. However, you can try to generate sustained demand from retail investors who genuinely want to hold the shares for the long term, and take measures to give some institutional shareholders a portion of their money back. This has been happening and it is very positive for the industry.

Q: Has the AITC been successful in educating investors?

A: Thanks to our work, we have helped make investment trusts a normal part of the investment landscape. Up until about 10 years ago, most retail investors and intermediaries would really have heard only about unit trusts. But now people think about Oeics, unit trusts and investment trusts as part of the same group of generic offerings.

Q: What are the main items on the agenda for the AITC in 2005?

A: We are close to concluding a number of areas in 2005. Most notably, we are approaching completion on investment trust regulations. The VAT case will be won or waiting for an appeal. We will update our directors’ handbook and also migrate it to an online version. We may also launch a generic investment trust savings product where consumers could buy any investment trust and be able to do it with lump sums or regular savings, and we will be looking to tie up a deal with a provider.