Special Report on Investment Trusts (4): A noble house returns to its roots in people's capitalism: Paul Durman looks at recent changes at Flemings, one of the oldest fund management houses, whose first trust was set up almost 120 years ago
The investment trusts which began to appear from the late 1860s were intended to offer private individuals access to the stock market, and to share in the benefits of British investment overseas. Having allowed their share registers to become dominated by institutional investors, trusts have again embraced private clients, wooing them in ever greater numbers with their savings schemes.
Lord Mark Fitzalan Howard, chairman of Fleming Investment Trust Management, says: 'Our aim is to return investment trusts to the people for whom they were originally designed, the private investor.'
Flemings is now pulling in pounds 2m a month through its savings plan, which Lord Mark says is 19 per cent of the industry total.
The whole business has been given a fillip by the introduction of savings plans, which offer the cheapest way of buying shares. The weight of money flowing into investment trust shares every month has also helped to reduce the discounts at which trust shares typically trade to their net asset values (NAV). This makes trusts less likely to attract a hostile takeover from a discontented institutional shareholder.
Flemings' introduction of its savings plan in 1984 followed an important restructuring of the group. The firm decided there was too much overlap between its 13 trusts. This led to the unitisation of three trusts which were standing at deep discounts to their NAV and the loss of pounds 127m of funds under management from a total of pounds 658m.
Flemings also rebranded its trusts by adding its name as a prefix to theirs. This recognised the advantage unit trusts had by being identified with a particular investment manager.
The group's first trust was set up in 1873. Robert Fleming became involved in investment management through his need to invest the profits from his business as a jute merchant. Although Flemings later moved into other areas, investment management remains by far the largest. Today it manages about pounds 28bn and employs more than 4,000 people world-wide.
About pounds 2.4bn of this is in investment trusts, which, until recently, made it the biggest manager in the industry. Henderson's acquisition of Touche Remnant means that it now just pips Flemings for the top spot.
The Fleming family still own about 40 per cent of the company. Robin Fleming, the current chairman of Robert Fleming Holdings, called all his relatives together last year to tell them more about what it is they own.
One of the reasons behind Flemings' eagerness to attract private clients is its recognition that many institutional investors are 'inappropriate' shareholders of trusts, their holdings often dating back to the time when they lacked expertise of a particular market.
Nevertheless, Flemings keeps in close touch with institutional holders of its trusts, one of the reasons the firm has not 'lost' a trust in recent years. Lord Mark says the other reason is good investment performance, its average trust having out-performed the industry average over the last 10 and 15 years.
Not all have done so well, and a five-year comparison is less flattering. Flemings' worst performing fund is European Fledgling, whose shares have lost more than two-fifths of their value since it was converted from an open- ended fund in 1990. David Paterson, investment director, says the trust has stuck to its brief of European smaller companies and believes it has performed reasonably well against that benchmark.
With private investors in mind, Flemings has turned annual meetings of its trusts' shareholders on their heads. There was a time when investment trusts measured the success of their AGMs by the lack of investors attending and by their brevity. Lord Mark says at least one meeting was completed in under a minute.
The company is now keen to encourage a good turnout of trust investors, to encourage better understanding of share ownership. Flemings' trusts regularly attract 100 shareholders, and it has had as many as 200.
Lord Mark adds: 'I can truthfully say that it was one of the happiest days of my life when we had to adjourn the Claverhouse AGM and have it next door (in the Institute of Chartered Accountants).' Individual investors are given the opportunity to ask the managers of their money what's going on. Lord Mark says: 'I've sweated quite a lot at some of these AGMs but that's how it should be.'
In another move aimed at delivering its product to the private investor, Flemings makes more effort servicing independent financial advisers. Flemings is one of the groups which enables advisers to take a commission from new clients making an investment.
The erosion of large discounts during the 1980s made it possible for Flemings and others to launch new trusts. The company brought in pounds 25m with its High Income trust in 1989, pounds 60m with its Emerging Markets trust in 1991 and, a year ago, pounds 92m with its split-capital Income and Capital trust. Opportunities for further launches are much reduced since last year's Budget eliminated an anomaly which allowed new investment trusts to take up to pounds 12,000, twice the annual limit, from personal equity plans. Lord Mark says new trusts will no longer be able to take pounds 150m or more and a number of recent trusts have had to be scaled down.
To increase the size of its existing trusts, Flemings is meeting some purchases through its savings scheme with newly issued shares. This is only possible where shares are trading at a premium to NAV, which restricts this to Claverhouse, Income & Capital and Emerging Markets.
The industry's longer term ambition must be to increase its share of the personal savings market. Deposits with the Halifax Building Society alone are more than twice the size of the total funds invested through investment trusts.
'If we talk grandly about getting pounds 2m a month, that's not even crawling,' says Lord Mark. He says investment trusts are ideal for the first time investor to gain exposure to the stock market. 'The more people who invest in the stock market, the greater will be their understanding of what capitalism is all about.'
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