Investment strategies for trustees, attorneys and deputies

 In Finance & Investments, Trusts

Disclaimer: LawSkills provides training for the legal industry and does not provide legal advice to members of the public. For help or guidance please seek the services of a qualified practitioner.

What are the ‘Investment Themes’ driving returns and influencing professional advice?

Investment philosophy may seem like a very dry topic, but it can quickly turn highly emotive when things go wrong.  Think tech stocks in the 00’s or bank stocks in 2008 or looking ahead; potential write downs in carbon intensive industries over the next 10 years.  Emotive topics have the potential to drive complaints, whether justified or not, they will be seen through the lens of hindsight.

“The eyes of all future generations are upon you. And if you choose to fail us, I say – we will never forgive you.” Greta Thunberg – UN Climate Summit, New York, 23 September 2019

When discussing investment themes there are 2 main topics which dominate debate among investment professionals.  The ‘Active Vs Passive’ question and the ‘Responsible’ Vs ‘Traditional’ investment portfolio.  Both of these debates are highly relevant to trustees, attorneys and deputies when making investment decisions.  They can’t be ignored and one way or another a stance must be taken and it is best to document your reasons for adopting your chosen investment philosophy.

‘Active Vs Passive’

An Active investment strategy employs a fund manager or other Active Participant to make proactive investment decisions and choose the specific companies and investments to make, with the hope of beating the market with their superior insight and good decision making.

The LawSkills Monthly Digest

Subscribe to our comprehensive Monthly Digest for insightful feedback on Wills, Probate, Trusts, Tax and Elderly & Vulnerable client matters

Not complicated to read  |  Requires no internet searching |  Simply an informative pdf emailed to your inbox including practice points & tips

Subscribe now for monthly insightful feedback on key issues.

All for only £98 + VAT per year.

Lawskills Digest

A Passive investment strategy (often referred to as low cost index investing) does away with the Active Participant and instead the investor simply replicates an index at a low cost.  The theory says that active managers are more often wrong than right and there is no reliable way of predicting who will be a good manager in the future based on past results, so why try?  Simply replicate an index at low cost and achieve an ‘average’ market return.

The implementation of MiFID II has seen increased transparency on the true cost of investing.

‘Responsible Vs Traditional’

In recent years there is increasing evidence that funds with a ‘Responsible’ mandate are outperforming their ‘traditional’ counterparts.  Responsible Investing could therefore be considered an important source of additional investment returns (Alpha) for investment portfolios.

The long-term investment case for Responsible investing arises from the need to change the global economy.

Greenhouse gas emissions must be cut almost in half by 2030 to avert global environmental catastrophe, including the total loss of every coral reef, the disappearance of Arctic ice and the destruction of island communities, a landmark UN report has concluded.

Drawing on more than 6,000 scientific studies and compiled over two years, the Intergovernmental Panel on Climate Change (IPCC) findings, released in October 2018, warn enormous and rapid changes to the way everyone on Earth eats, travels and produces energy need to be brought in immediately.

Though the scientists behind the report said there is cause for optimism, they recognised the grim reality that nations are currently nowhere near on track to avert disaster.

As the effects of climate change are felt with increasing ferocity, so the rate of change will need to increase.  Investing in companies that are on the leading edge of the change rather than the laggards provides for higher growth potential.  Conversely, investing in responsibility laggards comes with increasing financial risks for investors as both regulations and investor sentiment move against these companies.

The research website Fund Eco Market www.fundecomarket.co.uk identifies 11 different Responsible styles, including Sustainability Themed, Faith Based and ESG Plus.

How should trustees, attorneys and deputies respond to changing investment themes?

What guidance does statute and case law provide us when making decisions about an investment theme? S4(1) and s4(3) The Trustee Act 2000 set out the standard investment criteria of ‘Diversification’ and ‘Suitability’.  Any of these strategies could be suitable and diversified, so this does not really help.

Speight v Gaunt [1883] gives us the general principle that a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own.

“A low-cost index fund is the most sensible equity investment for the great majority of investors.” – Warren Buffett

I think we could describe Warrant Buffett  – one of the greatest active stock pickers of all-time as a prudent person of business yet anyone that follows Buffett will note that he is regularly found extolling the benefits of a passive investment strategy.

“Achieving net zero emissions will require a whole economy transition – every company, every bank, every insurer and investor will have to adjust their business models,”

“This could turn an existential risk into the greatest commercial opportunity of our time.” – Mark Carney

Another person I think we could agree as a prudent person of business is the former Governor of the Bank of England and now UN Special Envoy for climate Action and Finance – Mark Carney.  In June this year he joined Andrew Bailey (current Governor of the Bank of England) François Villeroy de Galhau (Governor of the Banque de France) and Frank Elderson (Board member of the Nederlandsche Bank)  to write about the need transition the economy and the whole financial system to take account of climate change as a matter of urgency.

Cowan v Scargill [1985] gives us the principle that it is only if the moral and personal considerations of the trustees do not have an impact on the financial position of the beneficiaries that the trustees can take them into account.

Reframing what is considered ‘normal’.  For years we have made the assumption that there is a normal way of investing which does not take account of responsible investment principles, and that responsible investment is an outlier position that requires a moral choice – with the assumption there is a cost to this choice.  The financial services industry is changing very quickly, regulation, ethics and most importantly allocation of capital is making this assumption look outdated.  I argue that incorporating some form of responsible investment principle is now the normal way of investing and that to discount these principles is the outlier choice.  In other words, responsible investing is and should be treated as the default methodology.  Morningstar published research on 2020 Q2 fund flows showing that assets in European ‘sustainable funds’ rose 20% compared with an increase of just 11% for the overall European fund universe.

Passive funds now represent 25% of the European sustainable fund market, which is up from just 14% five years ago.

Allocation of capital suggests that there are a great many ordinary prudent people of business investing sustainably and passively, and this is not always a moral choice, rather it is a calculated financial decision for their own financial interests.

Emerging Trends

In recent months we have seen the launch of ‘passive + responsible’ discretionary managed model portfolios, these represent an interesting development and a development that will be worth keeping a close eye on.

Practice points

  • Pick a camp – are you choosing active or passive? Responsible or not? There is no automatically correct answer, but document your reasons and been seen to take a position based on the facts of the case.
  • MiFID II is making the cost of investing increasingly transparent. If you have a high cost portfolio you would be wise to document your reasons for choosing to remain invested with this investment philosophy so that you can defend future complaints about charges robustly.  Most active managers under-perform low cost passive strategies in the long term.
  • Benchmark your investment portfolio against a range of other potential investment philosophies, not just the default benchmark presented to you by the investment manager.
  • Ask your investment adviser if they offer independent or restricted advice. Beware of “Restricted – whole of market” this is a term not officially recognised by the regulator and these advisers are classed as restricted.
  • An independent adviser should be able to discuss the pros and cons of a range of investment philosophies.
  • When using restricted advisers you must understand the nature of their restrictions and document why they are nonetheless the most suitable adviser for your particular case.
  • Use a checklist of best practice questions during your investment meetings.

FREE monthly newsletter

Wills | Probate | Trusts | Tax  | Elderly & Vulnerable Client

  • Relevant learning and development opportunities
  • News, articles and LawSkills’ services
  • Communications which help you find appropriate training in your area
Recent Posts