If you’ve been following QuotedData for a while, you’ll recognise Peter Hewitt from the many interviews that we’ve done with him over the years. As he retires from Columbia Threadneedle, we asked Cherry Reynard to capture some of his thoughts on the sector.

The investment trust sector has some well-documented challenges: from arbitrageurs to discounts, the threat of long-term asset funds (LTAFs) or exchange-traded funds (ETFs). However, Peter Hewitt, the outgoing manager of the CT Global Managed Portfolio Trust (CPMG/CMPI) and 40-year veteran of the sector says investors write off the sector at their peril, pointing out its remarkable capacity to regenerate over time.

He says, “the great thing about investment companies is that just as you’re thinking I can’t really see a future for them then, chameleon like, they can shed their skin and come back in a slightly different format.” The sector has seen more difficult moments than these: the split-cap scandal at the start of the century, for example, looked like an existential crisis at the time but at each stage the sector has regrouped and come back better.

To his mind, one of the most important initiatives of his career has been the advent of share buybacks in 1999. This has had a long-term impact on the management of discounts, and has been part of a broader improvement in corporate governance for investment trusts. Consolidation has become more commonplace, and boards have been far less tolerant of serial underperformance. Board diversity has improved, and skill levels are generally better.

“Over the past three or four years, there has been a series of mergers. AVI Japan [AJOT] and Fidelity Japan [FJV], for example. Trusts will often go from £300-400m to £700-800m. It creates fewer, bigger trusts. That is actually a very healthy thing.” He says the recent review on Murray Income (MUT) shows how far the sector has come. It had seen lacklustre performance but was “not a disaster” and it shows an increasing dynamism on the part of the boards and willingness to challenge investment managers.

Tougher governance needed

However, he believes the sector needs to continue to toughen its governance structures and improve board composition. He says: “The quality of boards still needs to improve, particularly in the context of having directors with more investment trust experience. That could be fund management or marketing, but it would be better than, say, an accounting firm partner, or a global CIO.” He points to the appointment of Richard Curling to the board of Monks (MNKS) in May of this year as an example of the right type of hiring. Curling runs the funds of investment trusts at Jupiter and has a wealth of good experience he can bring to the trust.

Find a new generation of investors

Another challenge for the sector is finding a new generation of shareholders. The natural shareholder base will vary for each trust, but there are a few discernible trends. Hewitt points out that some buyers have evaporated: pension funds no longer hold investment trusts, for example. Also, while private wealth managers are still important holders of investment trusts, they are unlikely to create any additional demand. His view is that new buyers could come from a wave of smaller wealth managers, who are breaking off from the large groups in search of more investment freedom.

“That’s a natural area, because they want to be different. They have often left a larger firm because they don’t want someone telling them to have x% in Europe, or y% in emerging markets. They want to have investment companies because, overall, they perform better than open-ended. This is a potentially important audience, but investment trusts have got to do a lot of work to find out who they are and convince them to buy.”

Retail shareholders are another fertile area, but again, there are challenges in finding how to communicate with them. “How do you genuinely stimulate demand? And at the moment, it’s not easy,” he says.

“There’s a growing number of people who have a reasonable level of wealth, who like to do things themselves, who will interrogate a website, look at fact sheets. For them, digital communications are a natural way to access them.” Targeting retail investor roadshows, which are generally well-attended, is another potential route.

There may also be a role for niche trusts in smaller, defined contribution pension funds and SIPPs. Investment trusts remain a compelling option to access private equity, for example, which may have a role in long-term pension savings.

There are threats but the sector is adaptable

There is a potential threat from Long-Term Asset Funds (LTAFs). However, Hewitt doesn’t think it’s an immediate problem for the sector. There are still issues to be resolved on liquidity, on platform availability and on fees. Equally, there are areas where LTAFs are unlikely to provide a solution, such as renewable energy infrastructure. That said, they don’t have the same discount problems as investment trusts.

Hewitt believes active ETFs may pose more of an immediate challenge to the investment trust sector. Major players are coming into the market and the costs are competitive. Normal passive funds are also an issue. Part of the sector’s strength is that it facilitates truly active management, and it has suffered as mega-cap dominance has seen passive funds outperform.

It would be useful if the market shifted a little, he says. The focus on US mega-caps has left almost all active funds trailing in the wake of their passive equivalents. Investment trusts, which often have parameters on how much they hold in individual companies, are always likely to struggle when mega-caps are dominant.

Hewitt adds: “Polar Capital Technology [PCT] and the Allianz Technology Trust [ATT] are both fantastic trusts. I have held both and they have made 10 times their original investment. But here’s the thing, they’ve hardly beaten their comparator indices. Why is that? Because the Dow Jones Technology Index has huge weightings in Microsoft or Nvidia.” The nascent revival in the small and mid-cap sector, plus lower interest rates, and market diversification away from the megacaps may fuel a revival in performance and push discounts lower.

Any regrets?

Regrets? He admits to a few. There are the usual fund manager regrets of selling too early or too late, not buying enough. However, he has no regrets over his involvement in investment trusts over the years. In fact, he can’t quite bring himself to leave completely, with a seat on the board of the Association of Investment Companies, and other areas of connection. Investment trusts remain a “fantastic savings vehicle” – and, with a few tweaks, fully fit for the future.