David Barron has a lengthy pedigree in the investment trust industry. He started his career with Robert Fleming, before becoming head of investment trusts at JP Morgan Asset Management. He was chief executive of boutique investment manager Miton Asset Management, before taking on directorships at a range of investment trusts. At each stage, he has built businesses, worked closely with clients, considered new product opportunities and found new and innovative ways to deliver high risk-adjusted returns for investors.

His career has allowed him to work with a range of skilled directors and board chairs, plus senior asset management personnel, industrial experts, entrepreneurs, diplomats and economists. This has given him real insight into the strategies that are most effective in driving strong governance and investment performance.

He says: “It is vitally important to set out how a product is different, how the manager, and its investment approach is different and the advantages it offers.” He sees his current role to “push and cajole and encourage” investment managers to deliver really good outcomes for shareholders.

A good board?

He says that while investment trust boards are often characterised as a small group of individuals with close connections to the industry, expertise is vitally important: “You need people who understand (excellence in investment management), and if they understand it better, they can hopefully exert pressure more effectively, be more constructive, and get better outcomes for shareholders.”

Directors have a fiduciary role to look after shareholders and that means making change where necessary. David joined the board in 2016 and became chair in 2017. When he joined, he says: “DIGIT was a much more conventional UK equity income portfolio. So, among the top ten holdings were HSBC, Shell, Vodafone, as now, Unilever and Astra were there, but also, some income trust favourites such as Provident Financial, and other higher yielding UK names. Overall, the trust was much more like the benchmark.”

The shareholders were also different, with a major UK life company and large national wealth management chain among the top holders. However, the trust’s performance was lacklustre, and there had been a number of dividend cuts – not a good outcome for an income trust.

David says: “Boards have to take a view. There are times when the board’s role is very much managing business as usual. However, there are times when boards have to be bold and instigate significant change. This was one of those times.”

Ben Ritchie, then head of pan-European equities, and his team became much more closely involved. The trust started to change. The first move was to step away from the more traditional approach of buying high yielding UK equities, to the current approach, with a greater focus on total return, and income sustainability. Greater emphasis was placed on the quality of company balance sheets and a more concentrated portfolio. The board also signalled a willingness to use DIGIT’s reserves to maintain the income payment while the portfolio transitioned. The management team also formalised the sustainable overlay,

David says: “Success starts with having a number of clear building blocks in place, and a clear approach, offering something that investors clearly value.”

The challenges today?

David says trusts need to be ready to adapt to new environments: “When I joined the board, the UK market was around 8% of world markets. It's now 4%. There are also changes at the regulatory level and there’s change through technology. All those factors impact investment trusts. It is a feature of investing, of markets, that there will be constant change.”

A key change, in his view, is the availability of other types of collective fund. That includes passive investment and the evolution of the Exchange Traded Fund (ETF) market. At the same time, regulation has reshaped buying activity. The consolidation among wealth managers, for example, is regulation-driven, and it has an impact on their ability to buy investment trusts. “This is a period of acute and rapid change, perhaps more so than in the past.”

He adds: “It comes back to those core building blocks: what is the trust trying to do? Why is it justified to do it in an investment trust? Are you doing it well? And are you communicating clearly with an audience who values that?” Investment trusts have endured for a long time, but they have to keep reinventing and refreshing to stay relevant.

He believes that retail investors represent a significant new audience for investment trusts, particularly through the major investment platforms such as interactive investor, AJ Bell, and Hargreaves Lansdown. The addressable market for investment trusts may increase over the medium term. There are also small boutique wealth managers emerging who may prove to be the perfect buyers for investment trusts.

Current priorities

Recently, the trust has had a more difficult run of performance, and David says the board continues to monitor that closely. This includes looking at whether the investments being made are consistent with the approach and understanding whether any problems are temporary or structural. The board also provides a bridge to shareholders, consulting them on their views, looking at what is happening on the share register, and who is buying and selling. The board also has responsibility for monitoring risk.

David says: “We have to avoid being over exuberant when performance is good, and be measured and rational when performance is poor. The key is to understand why the performance has shifted - is it consistent with the managers’ process? Or have there been deviations from the process? Are any errors in stock selection explainable and consistent with the process?”

Ultimately the board is there to look after shareholder interests and to hold the investment manager to account. The DIGIT board has been robust in its duties over the years and will continue to ensure that shareholder capital is prudently managed in line with the long-term objectives of the trust.

Important information

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

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