Rising interest rates weigh on mutual fund performance

of Conference room bust up Baillie Gifford’s flagship Scottish Mortgage Investment Trust has cast a troubling spotlight on the oversight of these venerable structures.

The 114-year-old mutual fund called on one of its non-executive directors to resign last week after heavy criticism of the firm’s corporate governance. The trust announced this week that chairman Fiona McBain will step down at its annual meeting in June.

The concerns of Amar Bidet, who recently resigned from Scottish Mortgage’s board of directors, appeared to stem from the company’s expansion into a private holding company. He said the board did not have the necessary experience and was headed by a chairman who lost independence because she had been on her board for too long.

He added that managers did not have sufficient resources to oversee the trust’s diversification from public to private securities. He said he has a team to monitor private companies.

Scottish Mortgage also said the trust appears to own a late-stage private company that has not sought operational support. A quarter of the trust’s private companies are worth more than $2 billion.

The Baillie Gifford story takes place when rising interest rates crush the stock performance of several mutual funds.

A trust with a closed-end structure has provided a way for individual investors to own a privately held company, as investors can trade shares in the trust without disturbing the underlying portfolio.

Such companies have a higher investment potential than larger groups, but they are often more risky and offer less information. Questions are now being raised as to how such holdings have been managed.

private property
Scottish Mortgage has owned a privately held company since 2012 and holds up to 30% share of the privately held portfolio at the time of investment.

However, as the public market fell faster than private market valuations, the share of funds in private equity increased. As of the end of February, unlisted stocks accounted for 29.9% of his Scottish mortgage portfolio.

James Carthew, head of mutual funds at research firm QuotedData, said this puts managers in a bind. If the cap is not lifted, there is a risk that mutual funds will not be able to invest further in the companies in which they are invested, potentially diluting their holdings.

Other analysts question whether valuations attributed to private holdings by mutual funds reflect accurate prices, given that real value emerges only through a sale. Broker Winterflood Private Equity The ‘Growth Capital’ sector includes 5 mutual funds that primarily own privately held companies and currently trade at an average discount rate of up to 50% on asset value.

Scottish mortgages are currently trading at an 18% discount. This compares to an average discount of 9% for peers in Winterflood’s global mutual fund division. Bhidé criticized the board for not taking sufficient steps to narrow the discount by buying back trust shares. Scottish Mortgage said he bought back 2% of his shares issued last year.

Kirthew said stock buybacks would be difficult because Winterflood data shows trust gearing (loans that can amplify returns) has already reached 15%. The sector average is 6%.

Another popular mutual fund under scrutiny is RIT Capital Partners, a trust that manages money for the Rothschild family, and currently has 11% of its portfolio in private companies and a further 28% in private equity. held in a fund.

Investec analysts estimate that write-downs on these holdings are approaching, which could reduce the trust’s overall asset value by 4%.

But Investec analyst Alan Brierley’s main concern concerns fees, with £55m of equity-based payments made to managers over the past three years.

Brierley said the trust “cannot be invested simply for cost reasons.”Even though the Trust’s fact sheet shows “progress claims” he puts at 0.89%, the latest important information document (KID) indicates an all-in annual cost of 5.44%. The KID figure for Scottish mortgages is just 0.64%.

According to RIT, annual incentives for employees are capped at 0.75% of NAV and have never come close to this level. He added that over the past decade, the net worth has grown at a rate of about 10% each year.

in the meantime, shareholder question Payments to Chrysalis managers in 2021. The Trust paid £117m in performance and management fees at the end of its third year of trading. Shortly thereafter, the value of the investment plummeted as the market fell in 2022. Chrysalis stock has fallen 70% over the past 12 months.

While there has been “consistent improvement” in governance in recent years, Brierley said, “some companies remain complacent, like they seem to be living in a bygone era.”

https://www.ft.com/content/28844c31-deff-4411-bbc3-94bbd264e706 Rising interest rates weigh on mutual fund performance

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