Spiller, who manages the highly rated Capital Gearing Trust, only uses closed-ended funds for his equity exposure and believes they need to start acting more like open-ended funds in order to survive.
The manager says that too many trusts are failing to protect their investors as boards prioritise their own interests. He says the biggest issue is discount volatility, as many boards allow premiums to grow too high or discounts to widen by too much. "The quality of these trusts – on the whole – is pretty good but the corporate governance can be quite patchy," Spiller said.
"If a board sets out a clear intention about discounts, then they should keep to it. However, there is still the underlying problem that a lot of these directors don’t believe that their primary concern is the shareholders."
"I think that is really sad."
"If you take a trust like Personal Assets, it is in the right mould because they know that the best way to grow the trust is to keep a lid on the discount," he added.
Spiller says that Sebastian Lyon’s Personal Assets Trust is "the benchmark" for all closed-ended funds, because it has been able to significantly increase its assets by using a discount control mechanism.
"The board at Personal Assets buy back shares when the trust is on a very small discount and issue more when it is on a very small premium, so it is always trading around NAV," he explained. "When I started, it was £20m – it is now over £590m."
"It has been able to grow like that because of the structure they use and it is clearly the way forward for other trusts. It is a great way to deal with shareholders."
"Trusts need to develop in this way because individual investors – be it the widow from Aberdeen or the Oxford professor – don’t have the time or the contacts to keep checking what the discount is doing."
"They should be able to trust an investment trust – the clue is in the name really," he added.
Spiller believes that one of the biggest reasons why investment trusts have fallen behind open-ended funds in the pecking order is because of these issues.
"When I started, investment trusts were three times the size of open-ended funds – nowadays, it is six times the other way," he said. "That is partly to do with things like trail commission, but I think a lot of it is due to poor corporate governance."
"Obviously, there are laws in place so that it is illegal for investment trusts to be exactly the same as open-ended funds. However, I think they should be as close to that line as possible," he added.
The Personal Assets Trust was launched in 1981 – however our data only goes back to July 1995.
Nevertheless, according to FE Analytics, the closed-ended fund has returned 327.39 per cent to its investors over that time while its benchmark – the FTSE All Share – has returned 269.21 per cent. It has also been considerably less volatile.
Performance of trust vs index since July 1995
Source: FE Analytics
The trust has ongoing charges of 1.01 per cent. Lyon took over it in 2009.
Although Spiller is concerned about the lack of corporate governance in the investment trust sector, he says there are boards that are changing their tune and are now actively trying to manage their discount volatility – one such example is the Investors in Global Real Estate Trust.
"That trust was issued with a promise it didn’t keep," he said.
"It promised that it wouldn’t let its discount get past 5 per cent. However, we bought it at a much bigger discount. Thankfully since then, the management team realised that the best way to grow the trust was through the methods I just highlighted."
"It is now becoming a bigger company and because the underlying investments are liquid, it is capable of growing even larger. The performance has improved dramatically and hopefully it can continue to grow and prove the model," he added.
Investors in Global Real Estate Trust was launched back in 2006.
Spiller has managed the Capital Gearing Trust since 1982, making him the longest-standing fund manager in either the open- or closed-ended industry. Over 15 years, the Capital Gearing Trust has returned 341.38 per cent. As a point of comparison, the FTSE All Share has returned 99.42 per cent over this time, although it is important to point out that Spiller’s trust is very much a multi-asset portfolio.
Performance of fund vs index over 15yrs
Source: FE Analytics
Spiller runs a globally diverse multi-asset portfolio, with 44.5 per cent of the trust in index linked government bonds, 5.3 per cent in traditional government bonds, 17.3 per cent in preference shares and 28.5 per cent in investment trusts. He also has a small weighting to gold bullion.
Despite his thoughts on the lack of discount control mechanisms in the closed-ended space, investors may be surprised to hear that the Capital Gearing Trust is itself trading on an 10 per cent premium.
However, the manager says his trust operates very differently to others because of his high weighting to fixed income.
"We won’t allow the trust’s premium to go past 15 per cent, but the problem with Capital Gearing is that we don’t want it to get much bigger, because the underlying liquidity is small," he explained.
"The trust’s returns would decrease the bigger the shareholder base got, so it wouldn’t be fair on existing shareholders. There is a lack of liquidity, so I always feel that my direct responsibility is to the existing shareholders," he added.
The Capital Gearing Trust has ongoing charges of 1.29 per cent.
