Investing for future generations? Consider these trusts

Get Savvy – get rich slowly – by James Carthew

The government-backed campaign to get savers investing for the future was launched today, fronted by “Savvy the Squirrel”. There is a fair bit of scepticism about its likely impact but the intention is good at least. One thing that I worry about is that too many people equate investing to gambling, hoping to get rich quick. However, this is just as likely to result in getting poor quickly.

The concept of this week’s “In the Hot Seat” panel was to look at trusts that investors could use as very long-term investments, for children, grandchildren and on down the generations, for example. I talked to Mat Masters of Caledonia Investments (CLDN) and Frank Ducomble of RIT Capital Partners (RCP), both of which were set up with that in mind.

Both have a core of supportive family shareholders, the Cayzer family in CLDN’s case and Jacob Rothschild’s family for RCP, but while other similar families tend to invest through family offices, these two have chosen to invest through listed vehicles. This gives ordinary investors like me and you access to investing strategies and managers that would normally be beyond our reach.

Saba proof?

As activist hedge fund Saba has dominated headlines recently, some investors have expressed a concern to me that buying trusts as long-term investments does not work anymore, because there is a danger that they will be attacked and wound up, hobbled, or forced to change strategy whenever they go through a phase of being out of favour. I sincerely hope (and expect) that as an industry we will develop robust defences against this onslaught.

One idea that I have been touting is that companies change their articles – the rules that govern them – in ways that protect the rights of small shareholders. For example, I suggested the other day that companies could change the threshold to pass a special resolution, from simply securing the backing of 75% of shares voted to also requiring the backing of 75% of the shareholders voting. Instantly, one or two big shareholders would be unable to force their agenda on everyone else. I do not see why we could not do the same with ordinary resolutions – ie, requiring 50% of shares voted AND 50% of shareholders voting to pass an ordinary resolution.

Or, for a more extreme example, I talked about an example of power being handed to ordinary investors in my recent research note on AVI Global Trust (AGT). In the section on Korea (which starts on page 6) I talk about a recent rule change that says when votes are counted in ballots to approve audit committee members, no one shareholder can cast more than 3% of votes.

Family protection

In the meantime, the big family stakes that CLDN and RCP have, make for a good Saba deterrent. Investors should not have to worry about a change of strategy being imposed on these companies from outside. However, it also means that as a small shareholder you are aligned with the families’ goals. Although, if you feel strongly about the direction of these companies, do turn up at AGMs and ask questions – the boards do appreciate feedback.

In particular, while both CLDN and RCP are very good about buying back stock – both trusts appear to be in the market almost every day – I think that they are unlikely to try to aggressively narrow their discounts. I would not buy them solely with that in mind, but I would point out that both have traded on much narrower discounts in the past, and it is not that long ago that RCP was on a premium. On the panel, Mat and Frank both stressed that their job is to deliver NAV total returns. If they do their job well, I think the narrower discounts will follow.

For insight into the strategy, and the portfolios of the two trusts, please watch the recording or read our most recent notes on CLDN and RCP.

Part of what makes these two stand out from most investment companies is that they can invest in multiple asset classes (which is why they sit in the flexible investment sector), and they think about protecting against the downside as well as the upside.

Multi-asset options in the trust world

The flexible investment sector encompasses a wide variety of portfolios and strategies, but I have pulled out a subset of eight companies that have some similar characteristics.

RCP and CLDN are the two largest of these. Their discounts are wider than average. With the exception of Global Opportunities Trust (GOT) at the high end and Hansa (HANA) at the lower end, they all offer similar dividend yields. Capital Gearing Trust (CGT) has the lowest running costs but none of these are excessive.

Where it perhaps gets more interesting, is to look at their track records. The good news is that all of these companies have outperformed inflation over 10 years. Although, for me, that is the minimum that you should expect from them.

Majedie (MAJE), which is backed by the Barlow family, got a new manager and a new approach in 2023, so I have excluded its five-year and 10-year returns from this table.

HANA, which is backed by the Salomon family, stands out because it just made a large amount of money from selling its Brazilian maritime services business and acquiring Ocean Wilsons.

The really defensive trusts such as Capital Gearing (CGT), Ruffer (RICA) and Personal Assets (PNL) tend to come with much lower long-term returns. They also operate with very liquid underlying portfolios, so it is much easier for them to aim to trade on a zero discount. That would be impossible for CLDN and RCP to replicate. Their commitments to private investments make that unsuitable.

Returns on some private assets have been depressed since interest rates started to rise in 2022 and exits became harder to achieve, but both trusts have been successful in selling private investments recently, crystallising some big gains. As Frank described today, RCP stands to benefit from some of the high-profile IPOs that are being touted currently.

Step back, take a longer-term view

Too much of the noise around investment has been too short-term in focus, the mania about driving down discounts that dominates headlines in our sector is a symptom of this. Sometimes, especially when investing for future generations, it pays to step back and take a longer-term view.