Investment trust insider on changing managers – James Carthew: when fund managers just have to go
Over the past few weeks, we have seen a rush of boards removing or threatening to remove fund managers. I have said many times in the past that this is one of the great strengths of the investment trust model.
In addition to keeping managers on their toes, it means that trusts can remain relevant by adapting their investment objective and approach to suit changing market conditions.
These are hard decisions for boards to make, however. As most investors will acknowledge, it is all too easy to mis-time a change in strategy – buying at the top and selling at the bottom. Both European (EUT) and Jupiter UK Growth (JUKG) made significant changes in the past that didn’t work out as expected.
Baillie Gifford has won the management contract for European. This was launched as F&C Eurotrust but, with effect from February 2010 and after a period of poor performance, the board switched to Edinburgh Partners.
The choice at the time was based on the performance of the open-ended Edinburgh Partners European Opportunities Fund, managed by Dale Robertson. From its launch in April 2004, it had generated 5% per annum outperformance of its benchmark. Robertson had demonstrated an ability to time his investments – reducing risk in 2006 and picking up bargains in 2008 and 2009. His investment decisions were driven by long-term valuation estimates.
From about 2015 onwards, however, the trust started to lag its benchmark and the reason given was fairly consistent – market conditions do not suit the value style. An internal switch of managers within Edinburgh Partners – from Robertson to Craig Amour – did not resolve the situation.
Quantitative easing and low interest rates have been cited as reasons why value investing might not be working – anything that generates a yield is prized and, when assessing growth stories on a discounted cash flow basis, low discount rates flatter valuations.
In addition, technological advances are disrupting established business models, increasing the number of value traps.
That doesn’t necessarily mean the value style of investing will never return to favour. Investors seem to be calling time on companies with fast revenue growth but no-to-low prospect of generating decent profits. The withdrawal of the WeWork flotation and the collapse in the share prices of Uber (UBER.K) and Lyft (LYFT.O) illustrate this.
Baillie Gifford fans will hope this doesn’t signal a wholesale shift in markets. My guess is it probably won’t, but it might reflect a welcome return to sanity.
Jupiter UK Growth’s board has also lost patience… read more here