Readers may recall I’m a bit of an investment trust fan.
Besides that introductory article, I’ve written in-depth articles on three trusts – RIT Capital Partners, The Rights and Issues Trust, and Prodesse – and I included a few trusts in my nine lazy ETF portfolios.
Reminder: Investment trusts are companies that manage pooled investment vehicles and trade on the stock market. They have particular strengths and weaknesses over unit trusts and the passive alternative, ETFs.
While investment trusts aren’t for everyone, they do give us options, and the oldest in the UK have been around longer than air travel or the motorcar.
One such veteran is Alliance Trust, a Dundee-based FTSE 100 company that has been investing since 1888 and that currently manages over £2 billion of assets.
Alliance has seen a lot over the years, from multiple wars to abdications to fervent socialist Governments, so when it’s worried by the AIFM directive coming out of Europe, I think we should take some notice.
I appreciate European lawmaking is about as dull as it gets, but it can be important. I’ll try to keep this quick.
What is the AIFM Directive?
The Alternative Investment Fund Managers Directive, currently still in draft form, proposes an overarching set of regulatory provisions for all European investment managers not covered by the UCITS regulations.
If you don’t know what UCITS is either, I don’t blame you – it is the legislation that covers Unit Trusts, which make up about two-thirds of pooled investments in Europe. We’re currently on UCITS III.
UCITS regulations don’t cover the several trillion Euros in other pooled investments, which is what the AIFM Directive is meant to cover.
Let’s cut to the chase – hedge funds and other more opaque vehicles are what this is all about. The Eurocrats want to make such collective funds more transparent and secure, and to reduce the opportunity for cads in suits to make off with our money (bankers notwithstanding) or to threaten the financial system.
Why does this matter for investment trusts?
The trouble with the AIFM Directive is it’s deliberately wide in scope, in order to catch all kinds of dubious funds and investment schemes.
But that brings investment trusts into its remit, whether by accident or design.
The law firm Bingham, which has been monitoring and advising on the progress of the legislation, warns that:
In its current form the AIFM Directive would significantly reshape the European investment management landscape.
Even though the AIFM Directive refers to alternative investment fund managers, the Directive as proposed would require all entities managing or promoting pooled funds of any kind in the European Union — even those funds not normally thought of as alternative investment vehicles — to be subject to regulation.
Potentially tricky issues include the amount of capital an investment entity would be required to carry, restrictions on the use of leverage, and potentially impractical disclosure requirements.
What does Alliance Trust say?
Alliance Trust has attacked the legislation as ill-conceived, and has created an online petition that you can sign to show you’re against the AIFMD.
Its managers say that:
Alliance Trust has reviewed the draft directive and is concerned that the impact will be significant whilst providing no additional benefit or protection to investors.
Specific complaints include:
- Investment trusts are already regulated by existing UK regulation, raising the issue of ‘parallel track’ rules.
- Investment trusts do not introduce systemic risk, but will be covered anyway.
- As companies, investment trusts are meant to be governed by the board of directors, but AIFMD puts the emphasis on managers.
- The need to value assets whenever shares are issued will be a burden offering no extra protection to investors.
- Proposed capital requirements don’t properly reflect the redemption rights of shareholders in investment trusts.
- The position of investment trusts with multiple managers would be unclear under the draft proposals.
- Many trusts will be forced to close down, causing hassle and reducing choice for investors.
And there’s more. It’s all rather dry stuff, but according to Alliance Trust it adds up to enough to threaten the future of this established and useful asset class.
You can download the entire briefing note in PDF form from its website.
Will the AIFMD become law?
According to Bingham:
The EU Commission originally intended that the AIFM Directive would be implemented by the end of 2011. The AIFM Directive is now before the European parliament and there is a general consensus that a directive will be adopted.
However, Charlie McCreevy (European Commissioner for Internal Market and Services) said on 18 September 2009 that he recognised “that there are certainly ways to improve our proposal in several respects, for example on technical issues such as depository arrangements and valuation”.
Speaking at the FSA’s Asset Management conference on 19 September 2009 David Wright [a Deputy Director General at the EU] accepted that the AIFM Directive would have to be re-worked and that there would be a delay in implementation of at least one year.
In my experience, asset managers often raise complaints about any extra attempt to regulate their business, yet such dire warnings can be red herrings.
For example, a few years ago we were told that buying and selling shares individually would become almost impossible for most of us, but whatever legislation was being blamed for that was obviously either misrepresented or has fallen by the wayside.
As such, it’s possible that Alliance Trust and others protest too much.
On the other hand, investment trusts are largely a British phenomenon, and it is entirely feasible they will be caught out by the other 34 gazillion European countries not really giving a toss about the specifics.
The history of investment trusts is hardly trouble-free, admittedly – the split-capital issues of a few years ago that lost many investors money springs to mind. But in their current form I think they’re relatively safe and suitable for more experienced investors, and already well-regulated.
For this reason, I’ll be signing the Alliance Trust petition against the AIFM Directive.
Invest in or manage an investment trust? Please do add your thoughts on the AIFMD below.