ALEX Hammond-Chambers is a believer in giving investors the chance to make money. He thinks that for too long, the fund- management sector has lost sight of this basic imperative.
The widespread acceptance of mediocrity is partly due to the bear market that began in March 2000, and also arose because of the industry’s obsession with “benchmarking” against stock-market indices, says Hammond-Chambers.
AITCSpeaking in his office, tucked away in a basement in Edinburgh’s Rutland Square, Hammond-Chambers stresses these views are his own, rather than those of the Association of Investment Trust Companies, where he took over as chairman in December 2003. But he warns that if investment trusts continue to lose customers’ money — as disastrously happened in the split-capital investment trust scandal that caused individual investors to lose nearly £1 billion — they don’t deserve a future.
Hammond-Chambers says: “Investment trusts have to refocus on making money for their shareholders. That is the biggest challenge we face as an industry. If we can’t do that, there won’t be any investment trust companies.”
During his two-year stint as AITC chairman, Hammond-Chambers intends to focus on “excellence”, starting at the top, by ensuring that quality people sit on investment trust boards. He also wants the people who manage investment trusts — often highly paid fund managers at fund houses such as Isis Asset Management and Baillie Gifford — to be top-quality individuals who never lose sight of their purpose.
Hammond-Chambers, who worked at Ivory & Sime from 1964 to 1991, latterly as chairman and chief executive, says: “I have long thought that investment trusts are the best investment vehicle in the world — because of their capital gains efficiency, their ability to invest for the long term, their ability to take relatively illiquid positions, their ability to gear, to buy back shares at a discount and because of their governance structure.
“But they will never be any better than the people who run them. If we are to prove to be the best, then we must have the best boards and the best managers.
“Our boards should insist on having the best people to manage their trusts, focused on it and not distracted by other commitments. Many boards pay large fees to managers which should entitle us to the best they have to offer – meaning the best people.”
Hammond-Chambers, 61, who has a lifelong passion for the investment-trust sector on which Scotland built its reputation as a global fund-management centre, speaks highly of his predecessor Anthony Townsend, and of the AITC’s director-general Daniel Godfrey.
He believes Townsend, Godfrey and their AITC team have done an excellent job in raising the profile of investment trusts, in making it easier for investment trusts to buy back and cancel their own shares, as well as trying to level the taxation playing field in relation to the rival product category of unit trusts.
He points out that in January the trade body launched a legal test case in partnership with the investment trust JP Morgan Claverhouse over the imposition of VAT on investment-trust management fees. The move could save the sector £30 million a year.
Hammond-Chambers also believes Townsend and Godfrey performed well in steering the sector through the choppy waters of the ‘splits’ debacle, which many observers believe continues to taint it.
Now he believes a refocusing on essentials — most notably making money for investors — is paramount. Apart from anything else, Hammond- Chambers says this is necessary to see off the challenges from hedge funds and the property investment funds (PIFs) that chancellor Gordon Brown intends to introduce by 2005.
Hedge funds have experienced explosive growth, today accounting for $250bn to $500bn of assets. “After 150 years in business we are only a 10th or so of the size of this new business. It is serious competition for us.”
He believes that PIFs — known in the US as real estate investment trusts or Reits — could offer more attractive yields than investment trusts and that some holders of trust shares will switch into PIFs to get better income returns.
He also wants to tackle the red tape that dogs the sector — he said he had to plough through 500 pages before a recent Fidelity Japanese Values board meeting. He warns that this burden is making it unattractive for fund-management groups to launch new trusts. “There are huge costs that must be borne by the manager. Much of the cost of corporate governance falls on them.”
Hammnond-Chambers, who lives on Edinburgh’s south side, also aims to improve communication with member firms to ensure they feel they are getting value for money from the trade body and bring in large players that are currently not AITC members, such as the two Dundee-based Alliance Trusts.
But Hammond-Chambers, who sits on the boards of several investment trusts including Fidelity Special Values, Fidelity Japanese Values, American Opportunities, Ivory & Sime Optimum Income and Aurora, believes that the Higgs review and the current craze for corporate governance could be harmful to UK plc.
In his chairman’s statement for Fidelity Special Values, Hammond- Chambers said that the increasing concentration on process over risk- taking is likely to lead to “mindless rules-based and thoughtless voting” by institutional shareholders.
Such a back-covering mentality could also have serious effects on the economy. He says: “There is nothing in [these rules] that will encourage the emergence of new world-class companies, such as have emerged in numbers in the US in the last 30 years. Too much of Britain’s business growth comes from mergers and acquisitions which may explain why only two new major British companies have emerged from start-up in recent times: Vodafone and BSkyB.”
This article was published in the Sunday Herald on 18 April 2004