It is not a bad rule of thumb to invest in a similar way to people who already have a lot of money. Therefore, the logic of investing alongside in one of the investment trusts where a wealthy family has a large shareholding seems inescapable. But investors need to ensure their interests are looked after with equal care and attention.
There are a number of trusts where wealthy families have a significant stake. The Cayzer family own 49% of Caledonia, while the Rothschild family have a holding of approximately 22% of RIT. Brunner and Majedie have smaller, but significant, family shareholdings as well.
These trusts have often evolved over time, moving from being almost entirely run and managed by the family, to bringing in external shareholders, independent board members and some external investment expertise. They still vary as to whether they are self-managed, or managed by an external AIFM. Majedie and Brunner have external fund managers, who operate at arm’s length.
Families will almost always have representation on the board, an appointee who ensures that the interests of the family are properly communicated and looked after. There are obvious advantages to this type of structure. Mat Masters, CEO at Caledonia, says: “Having a long term, supportive large shareholder – that stability, and long-term working relationships – it means there are a lot of agency factors, for example benchmarking, that don’t come into the system. That has a profound impact on the culture, and we revel in that and try to get the best out of it.”
He says family shareholders can look long-term, helping investment managers stand back from short-term market noise. He says: “Investment teams are not having to report on what is going on in the market all the time and can focus purely on being investors without being distracted by marketing.”
Dan Higgins, chief executive at Marylebone Partners, which manages Majedie Investments, believes that having a supportive shareholder base has helped the trust through a number of shifts in investment strategy, including its most recent change. He says: “In 2022, the board of Majedie took the opportunity to create a relevant, modern day investment trust and ran a process with JP Morgan…it has been well-received by the market. The discount has narrowed significantly. We think that is because the board was so thoughtful about what would work in the new environment.”
He believes large family shareholders can help keep the manager honest in a way that would be difficult in a different structure. He adds: “‘New Majedie’ pursues what we call a ‘liquid endowment’ model. We want to emulate the same mindset that has served the elite university endowments well, particularly in the States. We are very long-term, very fundamental, we seek and harness different sources of returns, including alternatives. We are not driven by indices or benchmarks. But unlike the university endowments, we do not allocate to deeply illiquid or hard-to-value assets.”
The listing rules set parameters on the number of independent directors, disclosure and the rights of external shareholders. This should prevent families changing the investment strategy at a moment’s notice, or interfering with the direction of the trust. Andrew Hutton, a non-executive director at Brunner says the family are consulted and involved with the investment strategy, as would be the case with any large shareholder, but, crucially, “they have never sought to influence the direction of that strategy.” Also, he says, they ‘speak with one voice’ – there are no single family members trying to reshape the trust.
“The family is an engaged shareholder. If it wasn’t a family but a different corporate entity, the treatment would be the same.”
Nevertheless, there are risks with this type of structure. Liquidity can be an issue, and the trusts can trade at high discounts. RIT, for example, trades at a 23% discount to NAV[1], Caledonia at 35%[2]. For RIT, it is difficult to disaggregate the influence of the trust’s large holdings in private equity, but Caledonia’s performance has been strong and there is no real reason for its high discount.
RIT has been taking steps to address shareholder concerns. Its most recent report says: “During 2023, we invested in building our marketing and investor relations capabilities, conscious of the desire from shareholders for greater disclosures and more regular updates. During 2023, we undertook one of the largest buybacks in the investment trust industry, acquiring some 8.6m shares at a cost of £163m, our largest single allocation of capital in the year.” The trust has also committed to reducing the proportion of the portfolio represented by private investments.
There are other potential issues that can arise. Where a single family member has a large shareholding, it can be disruptive if they need to sell, creating an overhang in the shares. Equally, while the board may look balanced, it can be difficult to know what goes on behind the scenes – are independent directors sufficiently empowered to challenge family representatives over issues such as fees or governance issues? In this, actions will speak louder – if the issues of independent shareholders are persistently overlooked, for example.
There are subtler considerations as well. Masters at Caledonia says: “None of the strategies on the trust are raising money, and therefore don’t necessarily get the same feedback. This creates an ‘echo-chamber’ risk. But we think very carefully about this and talk to each other a lot. We have three specialist teams and their daily lives don’t necessarily overlap, but if someone wants to do something, we really talk about what is happening at our Investment Committee meetings.” He says their remuneration has a ‘Caledonia’ component as well as for their individual strategy.
For investors, there will be advantages in investing alongside wealthy families. Notably, that they can be reassured that wealthy people don’t stay wealthy by neglecting their investments. However, they will need to look out for a number of red flags: if issues of governance are raised but not addressed, if there are changes in the investment parameters, if the board does not seem truly independent, or if there is a lack of checks and balances. They need to ensure their interests are looked after every bit as well as those of the family.
[1] https://www.theaic.co.uk/companydata/rit-capital-partners
[2] https://www.theaic.co.uk/companydata/caledonia-investments