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Investing alongside the wealthy

Emma Agyemang, FT Money, 15 November 2019

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.

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.

… 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.

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