Memorandum from John Clare
I am writing to draw your attention to the uncertainties
which investment trusts are facing when depositing cash in banks
whose stability may be in doubt.
This problem was flagged up in a presentation
at last Friday's AGM of the Edinburgh based Scottish Investment
Trust. SIT is a large, broadly-based investment trust, with a
global investment remit. Nearly two-thirds of its shares are held
by more than 25,000 individuals; an average holding of about £19,000.
Another 25% of SIT's shares are held by pension funds and insurance
Most if not all of its individual shareholders
will have bought their shares as a long term investment in a company
whose objectives are to provide above average returns through
a diversified portfolio of international equities and to achieve
dividend growth ahead of UK inflation.
SIT is one of several investment trusts which
seek to offer small shareholders a relatively low risk (and low
cost) opportunity to benefit from global equity markets. Others
include the Alliance Trust (Dundee), Foreign and Colonial (London),
etc. Alliance and Foreign and Colonial are both bigger than SIT
and have correspondingly many more individual shareholders; more
than 50,000 for Alliance, and over 100,000 for Foreign and Colonial.
Investors in such trusts accept that, as with
any other equity-based investment, the value of their shares can
go down as well as up. Nevertheless, in seeking to preserve the
assets of its shareholders SIT at least has been obliged to take
risks to which investment trusts shareholders are unaccustomed
and to which, I believe, they should not be exposed.
An important way in which investment trusts
can manage risk on behalf of their shareholders is to temporarily
reduce their exposure to volatile equity markets by converting
some or even all of their equity assets into cash, for as long
as such volatility persists. That facility is not available to
the more popular (and, in terms of fees, more expensive) unit
trusts and OEICS.
However, in present circumstances, investment
trusts such as SIT understandably hesitate before depositing as
much as £100 million or more in commercial banks. Investment
trusts are not of course protected by the FSCS, and the loss of
such a sum (amounting to one sixth of SIT's total assets) would
have serious implications for its shareholders. The only alternative
would be to continue to invest most if not all of its assets in
equities, which might also expose its shareholders to the risk
of failing companies, and certainly to declining share values.
The ideal solution would be for the government
to give investment trusts and similar collective investment funds
an assurance that their monies on deposit with clearing banks
would be fully protected.
I appreciate that such a proposal might be extremely
unwelcome to the Treasury. Another option, therefore, would be
for the Bank of England, or a specially constituted public sector
bank such as is presently under discussion, to act as a deposit-taking
institution for collective investment vehicles, and then lend
those monies on, either to the commercial banks, or to individuals
and small businesses.
I accept that such an arrangement would discriminate
between the shareholders in investment trusts and those in other
companies, but most companies are net borrowers, not depositors.
Moreover, I would argue that shareholders in individual companies,
and certainly those who manage their investments on their behalf,
should be assumed to have a heightened awareness of the risks
they runcollective investment funds such as investment
trusts are conventionally (and properly) seen as an important
and valuable way of minimising risk for small shareholders with
little or no knowledge or experience of investing.
Please let me know if you like me to elaborate
on any of these points.
4 February 2009