personal finance

Family fortunes: how to invest alongside the wealthy


What is the secret to keeping wealth in the family? It might just lie in investment trusts.

For generations, Britain’s richest families have turned to closed-ended funds to preserve and grow their wealth. Witan Investment Trust was launched in 1909 to manage the estate of the first Lord Faringdon, Alexander Henderson. Caledonia Investments was acquired by the Cayzer family in the 1950s as a holding company for their various shipping interests. RIT Capital Partners, a vehicle for the Rothschild family’s wealth, was launched as an investment trust in the 1980s.

All of these trusts, and several others, retain strong family links today. Family members are often major shareholders, sit on the boards as non-executive directors or chairs and sometimes have a role in selecting the investments. However, as publicly listed companies, private investors can also buy shares in the trusts. Some argue that trusts with families who are large shareholders align well for those seeking a long-term investment strategy.

“Investing alongside wealthy families might seem like an elusive pipe dream, but thanks to the investment trust structure, it doesn’t have to be and can allow investors to access multigenerational, long-term, patient capital,” says Rebecca O’Keeffe, head of investment at platform Interactive Investor. “It plays well to the ‘if you can’t beat them, join them’ argument for those of us who don’t have quite the same means.”

FT Money has looked at the most established trusts to understand what they offer private investors and the pros and cons of investing with the richest families.

Family money

One compelling reason to invest in trusts backed by wealthy families is that they have put their “money where their mouth is”.

Having “skin in the game” sends a clear and powerful message to both existing and potential investors,” says Ben Newell, analyst at Investec.

His firm recently published a report shining a spotlight on the level of personal investments held by board directors and managers in the trusts they oversee.

It showed boards and managers have invested a total £3.4bn in their trusts. The largest investment by a manager was the Rothschild family, who invested £703m in RIT Capital, comfortably ahead of the next highest by the management teams of Pershing Square at £668m, Tetragon Financial Group with £257m and Apax Global Alpha with £194m.

The Rothschilds’ investment also topped the list of board members with most skin in the game. But other family founded trusts also featured highly. These include three Cayzer family members on the board of Caledonia. Chief executive William Wyatt and Jamie Cayzer-Colvin, executive director, are both great great grandsons of the founder and have £34m and £11m invested in the trust respectively. Another family shareholder, Charles Cayzer, has invested £1.2m.

William Salomon, a family shareholder and board director of Hansa Investment Company, has investments worth £21m. And Harry Henderson, family shareholder and chairman of Witan, has £8m invested in the trust.

“It’s incredibly reassuring to invest with these wealthy families,” says Annabel Brodie-Smith of the Association of Investment Companies, an industry body. “In some cases, they’ve been investing through two world wars, the great depression, the tech boom and bust and the financial crisis.”

Family-backed trusts typically follow two core investment strategies; a global growth approach that seeks a diversified international portfolio or a flexible investment strategy, that adjusts allocation between different asset classes. Of the six trusts with family links that FT Money investigated, Brunner Investment Trust, Majedie Investments and Witan sit within the AIC global sector, while Caledonia, Hansa and RIT Capital are part of the AIC flexible investment sector.

“These are clearly core strategies for the families invested in them and other investors may find this encouraging,” Ms Brodie-Smith adds.

The diversified portfolios on offer mean these trusts could offer a one-stop shop for investors who want access to a range of investments in one place.

Wealthy families are usually very appreciative of dividends. So it’s no surprise that several trusts offer very consistent income. Brunner, Caledonia and Witan all feature in the AIC’s “dividend heroes” list of trusts that have increased their dividends for 20 or more consecutive years.

Caledonia has increased its dividend every year for the past 52 years, Brunner for 47 years and Witan for 44 years. The latter two yield 2.3 per cent, while Caledonia has a yield of 2 per cent, as of November 8. While these yields are not the highest available, the focus on delivering consistently rising dividends is likely to be attractive to some income seekers.

A trust that is a vehicle for substantial family assets is also likely to emphasise careful investment management, which might suit more cautious investors.

“[These trusts] tend to have a real capital preservation focus which seeks to maintain the real value of that family’s wealth over and above inflation,” explains Jason Hollands, managing director at Tilney Group. “There’s definitely a place in the market for trusts that provide a good steady return that grow in real terms and are prepared to de-risk when the outlook is more uncertain.”

Power struggles

However, the emphasis on wealth preservation by some trusts means they may not shoot the lights out performance wise.

“It’s the whole idea of ‘get rich slow’ — and not rocking the boat once you get there,” says Ms O’Keefe.

This may be the wrong investment strategy for investors who are looking to build their assets. A wealth preservation approach is likely to underperform when the market is strong because it may miss opportunities that growth-focused trusts would capture.

Meanwhile, although the inclusion of family money in an investment trust may reassure investors, Investec’s report concluded that skin in the game was “no guarantee of superior returns”.

Investment experts also believe the size of the family’s holding plays an important role in how well private investor interests are served.

David Liddell, chief executive of online investment advice service IpsoFacto Investor, says: “There’s a big difference with a family stake that’s below 25 per cent and one that effectively controls the trust. The Rothschilds have about a 20 per cent stake; if you contrast that with Caledonia — the Cayzer family has about 48 per cent — that means effectively they own it.”

Mick Gilligan, head of fund research at Killik & Co, adds: “For me, the sweet spot would be a family that in absolute terms has a sizeable investment that’s meaningful to them and it’s quite a large number, but it’s not so big that they might exert undue influence.”

A family holding between 25 and 50 per cent or more of the shares could lead to a conflict of interest with non-family investors, he says. For example, the family may be reluctant to conduct share buybacks if the trust is standing at a wide discount to net asset value (NAV), as this would increase their stake further. Narrowing the discount may also be less of a concern for them than private investors as they intend to hold the shares for the very long term, across generations.

Family members who hold a large proportion of shares may also reduce a trust’s liquidity — how easy it is to buy and sell the shares. This will have the most impact on relatively small investment trusts which are backed by one or two large shareholders.

“The fact a family control the board means they can do things that an [ordinary] investment manager can’t do,” adds James Carthew, head of investment company research at QuotedData.

For example, the trust might decide to invest in pet projects or hold more cash on the balance sheet than other trusts would.

“That can be a good thing or a bad thing,” Mr Carthew says.

But if private investors dislike the direction the trust is taking, other than sell their shares, there is little they can do. A family’s controlling stake means they are likely to have the last word.

“Skin in the game is important but there are times when [managers or large shareholders] have too much investment and this gives them power; then you’re dependent on the quality of the board,” says Alan Brierley, analyst at Investec. “What we see is real polarisation in the quality of boards, like with Woodford Patient Capital Trust where the board and manager have basically sailed the ship into an iceberg.”

Individuals considering whether to invest in family-backed trusts should make sure they understand these issues and ensure their investment time horizon and risk appetite fits with the trust’s approach.

Mr Hollands stresses that investors should not select a family-backed trust on the strength of its name alone, but on how well it might suit their wider objectives.

Longstanding family trusts

Brunner

The history: The trust can be traced back to the 1870s when Sir John Brunner and Ludwig Mond set up Brunner Mond & Co to produce chemicals for the cotton industry. In 1926, the company merged with three others to become the chemical giant Imperial Chemical Industries (ICI). The following year, the Brunner family sold its shares to establish a broad, long-term investment vehicle.

The family hold 29 per cent of shares. They remain actively involved through Jim Sharp, a non-executive director, who is married to Isabel Mary Brunner, the great granddaughter of Sir John Brunner.

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Investment approach: The trust aims to provide growth in capital value and dividends over the long term by investing in global and UK equities. Its investment portfolio is managed by Lucy Macdonald of Allianz Global Investors. She favours large, well-financed businesses with global reach, pricing power and corporate liquidity.

Key points: Brunner has a 47-year record of increasing annual dividend payments. It has a yield of 2.3 per cent and an ongoing charge of 0.67 per cent. It is trading at a discount to net asset value of 9.8 per cent. Analysts at Stifel view the trust positively, pointing out the discount has narrowed from 15 per cent three years ago under Ms Macdonald’s management.

In detail: Brunner

Top five holdings (%)

  • Microsoft 4.9
  • Muenchener Rueckver 3.2
  • Roche 3.1
  • UnitedHealth Group 2.9
  • Accenture 2.8

Source: Allianz Global Investors, 30/09/19

Top five sectors (%)

  • Financials 23.3
  • Industrials 22
  • Health Care 14.6
  • Technology 11.7
  • Consumer goods 8.9

Excludes cash. Source: Allianz Global Investors, 30/09/19

Top five regions (%)

  • North America 43.7
  • UK 24.7
  • Europe ex UK 23.5
  • Pacific ex Japan 5.7
  • Japan 2.5

Source: Allianz Global Investors, 30/09/19

Caledonia

The history: Caledonia is a self-managed investment trust with roots in the shipping empire established by Sir Charles Cayzer in 1878. The trust launched in 1960 and the Cayzer family owns 48.5 per cent of the share capital. Its chief executive William Wyatt and Jamie Cayzer-Colvin, executive director, are both great great grandsons of the founder. Another family member, Charles Cayzer, is a non-executive director.

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Investment approach: The trust aims to grow capital and income by investing in both listed and unlisted businesses and managing risk to avoid permanent loss of capital.

Key points: Caledonia has increased its dividend for the past 52 years and currently has a yield of 2 per cent. The trust has a market capitalisation of £1.7bn and an ongoing charge of 0.94 per cent.

Analysts at Winterflood Securities describe it as “one of the best-kept secrets in the investment trust sector”, praising its “conservative, value style”. However, the trust has a very wide discount to NAV of 18 per cent, likely due to the unlisted positions and large family holding.

Mr Wyatt argues that the family’s shareholding has a number of positives for external investors. “We do not have a manager incentivised by attempting to increase its fees which allows us to concentrate purely on growth in NAV per share,” he says. “Our significant family shareholder also resonates with the investee companies in our private capital business, to whom we provide enduring capital and support with a longer-term horizon than other private equity providers.

In detail: Caledonia

Top five holdings

  • Deep Sea Electronics
  • Cobehold
  • Seven Investment Management
  • Buzz Bingo
  • Cooke Optics

Source: Caledonia Investments, 30/09/19

Top five regions (%)

  • UK 33
  • North America 30
  • Europe 23
  • Other 11
  • Cash 3

Source: Caledonia Investments, 30/09/19

Hansa

The history: Hansa Investment Company, previously known as Hansa Trust and Scottish and Mercantile Investment Trust, launched in 1912. Since the 1950s it has been closely associated with the Salomon Family, who are beneficiaries of family trusts that are themselves substantial shareholders of Hansa Investment.

William Salomon is a current director of the trust as well as being senior partner of the portfolio manager, Hansa Capital Partners. His father, Walter Salomon also contributed to the trust’s development. In the 1950s he invested in a Brazilian infrastructure business, Ocean Wilsons Holdings, and engineered a share swap whereby shareholders of the company received non-voting shares in Hansa Investment. This investment has grown from £2m to a market value of around £100m. It represents a quarter of the portfolio.

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Investment approach: The trust invests in listed and unlisted special situations, which may not normally be available to the general public, with the objective of growing shareholder value.

Key points: The trust has an ongoing charge of 0.62 per cent and pays a yield of 5.3 per cent. It is trading at a very wide discount to NAV of 33 per cent. Analysts at Winterflood view it as “a long-term extreme value play” but add that its top holding will make performance more volatile.

In detail: Hansa

Top five holdings (%)

  • Ocean Wilsons Holdings Limited 24.9
  • Findlay Park American Fund 6.3
  • GAM Star Fund PLC — technology 4.7
  • Vulcan Value Equity Fund 4.6
  • Select Equity Offshore, Ltd 4.5

Source: Hansa Investment Company, 30/09/19

Top five sectors (%)

  • Core funds 38.1
  • Strategic (Wilson Sons & Ocean Wilsons Investments) 24.9
  • Global equities 17.8
  • Diversifying assets 11.7
  • Thematic funds 7.2

Source: Hansa Investment Company, 30/09/19

Majedie Investments

The history: The trust is associated with the Barlow family. Their original business involved the ownership of rubber estates in Malaysia and was established in 1910. Majedie was the name of one of the rubber plantations. Over time the business evolved into an investment company, becoming an investment trust in 1985. The Barlow family has a holding of 53 per cent.

William Barlow, chief executive of the company and a family member, says: “Whilst the family takes a keen interest in the company, the board is independent and the company has always been managed for the benefit of all its shareholders.”

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Investment approach: The trust invests in a global portfolio and aims to maximise total shareholder return while increasing dividends by more than the rate of inflation over the long term. It owns a 17.1 per cent stake in the asset management boutique, Majedie Asset Management, having been a founding investor in 2002. Majedie Asset Management has been running the trust’s assets since 2014.

Key points: The trust has a market capitalisation of £138m and a yield of 4.4 per cent. It has an ongoing charge of 0.99 per cent and is trading at a discount to NAV of 14.5 per cent.

In detail: Majedie

Top five holdings (%)

  • Majedie Asset Management 27.5
  • MAM Global Equity Fund 12.9
  • MAM Tortoise Fund 12.9
  • MAM UK Income Fund 7.7
  • MAM US Equity Fund 5.3

Source: Majedie Investments, 30/09/19

RIT Capital

The history: Launched in 1988, RIT Capital has its roots in an older investment trust associated with the family bank, NM Rothschild & Sons. Lord (Jacob) Rothschild chaired the trust from launch until September 2019, when he stepped down from the board. He remains honorary president and his daughter Hannah is a board director. The trust’s manager, J Rothschild Capital Management, is a wholly-owned subsidiary of RIT. The Rothschild family is also the trust’s largest shareholder, with a stake of 21 per cent.

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Investment approach: RIT Capital seeks to deliver long-term growth, while preserving shareholders’ capital. It aims for healthy participation in up markets and reasonable protection in down markets. It takes a flexible approach — investing in a diversified, international portfolio across both listed and unlisted stocks — as well as funds.

Key points: RIT Capital has an ongoing charge figure of 0.68 per cent and a dividend yield of 1.6 per cent. It has a market capitalisation of £3.4bn. The trust is a popular core holding among investors and is well thought of by brokers, including Killik & Co and Investec. It is trading at a premium to NAV of 13.2 per cent.

In detail: RIT

Top five assets (%)

  • Quoted equity — long 32
  • Absolute return credit 25
  • Private investments — funds 16
  • Private investments — direct 12
  • Quoted equity — hedge 11

Source: RIT Capital Partners, 30/09/19

Top five regions (%)

  • North America 33
  • Global 26
  • Emerging markets 22
  • Europe 8
  • Japan 6

Source: RIT Capital Partners, 30/09/19

Witan

The history: Witan Investment Trust was launched in 1909 to manage the estate of Alexander Henderson, the first Lord Faringdon. First listed on the London Stock Exchange in 1924, it established Henderson Administration (now Henderson Global Investors) to manage its funds in 1932, and then sold its remaining stake in Henderson in 1997. In 2004, Witan became self-managed and adopted a multi-manager approach. Its portfolio is managed by 10 third-party managers.

Family member Harry Henderson is chairman of the trust but is due to step down next year. He, along with other family shareholders, own just 1.4 per cent of the trust. However, given the trust’s market cap of £1.9bn, their holding is worth a sizeable £26.6m.

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Investment approach: The trust is a multi-managed, global equity portfolio diversified across geographical region and sector. It aims to achieve long-term growth in income and capital.

Key points: Witan has a yield of 2.3 per cent and has grown its dividend every year for the past 44 years. It is trading at a slight discount to NAV of 3.2 per cent, broadly similar to its average over the past year. Ongoing charges of 0.87 per cent are inclusive of a performance fee, according to the AIC.

In detail: Witan

Top five holdings (%)

  • Apax Global Alpha 2.3
  • Syncona 2
  • Vonovia 2
  • Unilever 1.7
  • Tesco 1.5

Source: Witan Investment Services, 30/09/19

Top five sectors (%)

  • Financials 17.4
  • Industrials 16.2
  • Consumer Services 15.9
  • Consumer Goods 14.0
  • Technology 9.7

Source: Witan Investment Services, 30/09/19

Top five regions (%)

  • UK 28.3
  • Europe 23.0
  • North America 19.7
  • Asia 14.0
  • Japan 3.4

Source: Witan Investment Services, 30/09/19



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