THE word started spreading late on Monday evening. Something was happening to the management of the trusts which would be announced to the stock market the next morning In a move that sent shock waves through a normally staid part of the investment community it was announced that the management of four venture capital trusts had been switched from Aberdeen Asset Management to Close Brothers in London.
The news that management of the pounds-76 million trust was switching came as questions were being asked about the performance of the management working on the trusts.
A growing shareholder rebellion and concerns expressed by some of the companies in which the trusts invest suggest that the management transfer is not going to go through without a fight.
Further shock waves were sent round the sector when a hostile bid was launched for the pounds-471m Securities Trust of Scotland (STS).
Perpetual Income & Growth (Pigit) hit out at Martin Currie's record of management of the investment trust.
Much of it was done in coded language but Pigit had its tanks on Martin Currie's lawn.
The two battles are part of a likely future trend with increasing dissatisfaction among investors about the cosiness of the sector. Changes have also been encouraged by a change in the listing rules last year which will force trust boards to justify their choice of investment manager. If a board loses patience with the performance of a particular management group, it will increasingly put that manager on notice or even organise a "beauty parade".
Charles Cade, an analyst at Close Wins, says: "Boards have improved over the past few years and are becoming increasingly independent of management companies. Increasingly they are acting independently.
"What matters is that they act in shareholders' interests and not in the interests of the managment company."
The board of Edinburgh Investment Trust, led by Scott Dobbie, won a lot of kudos in the sector when it initiated a two-year process that included a "beauty parade" of possible managers.
This culminated in the management of the then pounds-1.4bn trust shifting from Edinburgh Fund Managers to Londonbased Fidelity Investments in 2002.
Baillie Gifford, Standard Life and Henderson Global Investors were also on the shortlist.
Figures from industry body the Association of Investment Trust Companies (AITC) show that the trend is growing. While 11 investment trusts changed manager in 1999-2002, 21 have done so since 2003.
Investment trust boards can also buy back their own shares to narrow discounts (the gap between share price and net asset value), and engage in other forms of corporate activity (such as tender offers, mergers and restructurings) to boost shareholder value.
But while some industry figures say that the sector has changed, critics say it has not changed enough.
"Too many boards of directors forget what they're there for, " says John Moore, an investment trust expert at brokers Bell Lawrie White, and a critic of STS.
"They also forget that the life of their trust is finite."
How many of the problems of the sector can be laid at the door of cronyism where board directors are effectively members of an "old boy's club" drawn from a limited gene pool.
Until quite recently a select band of upper-middle-class corporate lawyers, chartered accountants and City types cropped up on board after board in what appeared a relatively closed world, often seeing themselves as "trustees" rather than pro-active non-executive directors.
These clones could frequently be spotted with bowler hats and tightly furled umbrellas briskly striding across their native habitat, Edinburgh's Charlotte Square.
Some were effectively "placemen" of the investment management companies who could be relied upon not to rock the boat. Their ultimate loyalty was to that firm rather than to shareholders in their trust.
But while recent changes to corporate governance guidance have been sweeping through business and industry has it still to fully reach the investment world?
The change in the listing rules set out by the Financial Services Authority means that a board must explain in its annual report why it has chosen to retain a particular firm as investment manager.
"It will become an increasingly difficult paragraph to write if there have been several years of underperformance, " says one trust expert.
The sector has also responded with its own approach to the questions.
In its recently implemented code of corporate governance, the AITC says:
"When considering new appointments the board should be seeking to fill gaps in the mix. This could be to add skills. It should also seek to diversify the age range of the board."
But problems of cosiness and sameness do remain, and these have been highlighted by recent research conducted exclusively for the Sunday Herald, which looked at 68 investment trusts managed by a total of 10 fund management companies.
This showed investment trust boards remain very male-dominated. There were 333 director's positions at the trusts examined, of which 323 - or 97-per cent - were held by men. Only 10 of the directors' roles, or 3-per cent, were held by women.
This compares with figures from Cranfield School of Management for general plcs which show that 9.7-per cent of FTSE 100 director's roles are held by women. That figure has risen from 5.8-per cent in 2000.
The AITC comes up with a slightly different figure, which show that among AITC member companies, 6-per cent of investment trust directors are women.
Several prominent Scottish women, including Lady Balfour of Burleigh, otherwise known as the writer Janet Morgan, Carolan Dobson, Lesley Knox and Eileen Mackay, sit on several investment trust boards.
The Sunday Herald's research also highlighted that most people on trust boards are males who are middle-aged and older.
More than 75-per cent of the directors were aged 51 and over. The largest group, more than 41-per cent, were in the 51 to 60 age bracket with almost one-third (32-per cent) in the 61 to 70 age group. Nearly 3-per cent were in the 70 plus age range.
"None of these findings surprises me at all, " says Kim Yates, a consultant at headhunters Principal Search, which is placing growing numbers of women on trust boards. "It's the pale, male and stale syndrome. And the situation is probably worse in Scotland than it is in England.
"A good percentage of the shareholder base of investment trusts are women and it is not unreasonable to expect that other women should represent them on the board.
"I don't think the biggest hurdle is that incumbent directors are not wanting to appoint women. It is that women with suitable experience and gravitas are hard to find."
Yates says there is a limited supply of suitably qualified female candidates for election to investment trust boards. She said to qualify you have to be in your late 40s or early 50s, which means that they would have embarked on their work life in the late 1970s.
Yates adds: "At that time not many women were going into business or into other appropriate jobs. It's really a problem of supply not of demand."
Alison Loudon, an experienced director who oversees the non- executive recruitment wing of head hunters Finlayson Wagner Black, says there are challenges for the investment trust sector but that boards are starting to come to terms with these issues.
She said: "Boards have to broaden their pool of potential recruits from their own network of contacts and their own sector. They may get just the right person via that route who will fit well into a board but there are probably a lot of people out there who are not the usual suspects, who could make an important contribution to their business.
"My experience is that while there may be an initial resistance once the boards are provided with a wider potential group to look at, they are really open to it."
Dr Oonagh McDonald, a former Labour front-bench spokesman who is on the board of Allianz Dresdner British Portfolio Trust, says: "It probably was true even in the fairly recent past [that most investment trust boards were cosy and incestuous].
"But since the split capital trust scandal broke in 2001 the industry has made a great deal of effort to put its house in order. When boards are replacing non-executives they are increasingly going out to headhunters."
Robin Angus, director of Personal Assets Trusts, says: "If it is as low as 3-per cent I am sorry to hear that. But I think that is going to change quite substantially as increasing numbers of suitably qualified women reach their 50s. At the end of the day, however, the priority should be to get the right skills balance, than to get the right sex balance."
Daniel Godfrey, director general of the AITC says: "There is some justification for saying that investment trust boards were all too cosy up until 10 years ago. But boards are now much more pro-active and independent than they were. Balance is increasingly on the agenda.
"A female perspective can be very valuable and I would imagine that when a board that has no women on it and it is looking for new members, they will put gender down as one of their criteria."
John Moore of Bell Lawrie White says:
"What investment trust directors have to remember is that their role is to look after shareholders' interests. That has to be their utter and sole focus."
He warns that some investment trust boards have a blindspot for appointing the more successful investment boutiques established since the 1990s.
"Maybe talent doesn't reside with the mainstream fund management players any more. Boards are not fully aware the investment market is fragmenting."
Moore says investment boutiques which should be on trust boards' "buy" lists also include Artemis, Edinburgh Partners, New Star, Lindsell Train and Odey.
In its response the Investment Management Association warned that regulation would be "costly, disruptive, potentially over- prescriptive and unnecessary, given the sanctions already available under the existing regime".
It said that the requirements of listing rules, the Combined Code of corporate governance and the voluntary AITC Corporate Governance Code, are at least as demanding as FSA authorisation.
Godfrey says: "I see no purpose in [regulation]. The risks and costs would outweigh any possible benefit. But in the wake of the splits situation it is right that they clear the air in this way."
McDonald says: "If there ever was a case of throwing the baby out with the bathwater this [proposed regulation] was it." Angus says:
"I'm a status quo man. Under the status quo, consumers are protected by the full weight and majesty of the law under the listing rules and the Companies Act. This is the rock on which the investment trust industry stands. I hope and pray the Treasury sees sense on this."
WHO TRUSTS THE TRUSTEES?
10 fund managers 68 investment trusts 333 directorships
By gender By age 323 men 10 women (one woman serves on two boards)
By Age
36-40 yrs - 5.7 per cent
41-50yrs - 18.6 per cent
51-60 yrs - 41.4 per cent
61-70 yrs - 31.5 per cent
71 yrs + - 2.7 per cent
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