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Mental note: don’t invest in any small trusts that are incorporated in Scotland.”
These are the words of an English institutional investor in the investment trust sector, as jitters emerge ahead of September’s looming referendum on Scottish independence.
As with much of the UK’s financial sector, Scotland boasts a disproportionately large share of the venerable investment trust industry. Analysis by Winterflood Securities, the market maker, suggests 41 trusts are incorporated in Scotland, with their combined assets of £21bn accounting for a fifth of the industry.
These range from behemoths such as Alliance Trust, Scottish Mortgage Trust and Franklin Templeton Emerging Markets to tiddlers such as SVM UK Emerging, which has just £4.3m of assets.
A vote for independence may not change any of this, but Anthony Townsend, chairman of the Scottish-domiciled Finsbury Growth & Income Trust, admitted at its recent annual general meeting that his board had investigated the cost of relocating the fund to England. He estimated it at “several hundred thousand pounds”.
The process is complicated by the need to liquidate a Scottish company formally and create a new one in England, rather than simply re-registering the existing entity.
“This is not a straightforward process. It would have implications for the fund’s revenue reserves and possibly the tax treatment,” says Simon Elliott, head of research at Winterflood.
The example of the Henderson Far East Income trust, which redomiciled from England to Jersey in 2006, may be instructive. Not only did the move cost around £450,000, but the English company took six years to wind up. James de Sausmarez, head of investment trusts at Henderson Global Investors, says it would have been nearer two had it not been for an industry-wide value added tax dispute with the UK government that was dragging on at the time.
Nevertheless, this suggests a bill of around £20m if every Scottish Investment Trust were to head south.
Winterflood cites a number of reasons why they might consider doing so: the introduction of a Scottish financial regulator could raise costs and uncertainty; taxation of capital gains and income, as well as corporate tax rates, could change in an independent Scotland; and the UK Companies Act, which governs investment trusts, would need to be replaced by new, potentially different, legislation.
Moreover, investors from the rest of the UK, who are in the majority, may not want to hold money in a foreign vehicle.
Mr Elliott says he would be “surprised” if the majority of Scottish trusts had not at least asked what would happen if voters backed independence.
“It is something that is on people’s radars that they are becoming increasingly aware of. It is a significant amount of assets,” he says.
Grant Challis, a partner at Frostrow Capital, which performs the “non-investment” management functions for six investment trusts, including Finsbury Growth & Income, says the Pacific Assets trust, which it also looks after, is “in the same boat” and “has spoken to the same lawyers”.
However he adds: “One hopes that even if Scotland becomes independent, there would not be any ramifications and the investment trust sector will just continue rolling on.”
This view is echoed by others, who believe it is far too early for trusts to be drawing up firm contingency plans.
Mr de Sausmarez says Henderson is “not looking at it very seriously at the moment”, given the lack of clarity. “There are so many variables. If they vote in favour of independence, is Scotland immediately booted out of the EU so [a Scottish-domiciled trust] is a non-EU AIF [alternative investment fund]? I don’t know,” he says.
“I think the Scots will probably vote to stay in the UK. But if they voted in favour, it is not as if Scotland would be an independent state the next day. So I think it is a little bit premature to be spending a lot of time worrying about such things.
“Any investment trust that redomiciles from Scotland to England is going to cost them £500,000. Even if Scotland voted in favour of independence I would not be convinced there is a compelling argument for that.”
Edinburgh-based Baillie Gifford said it was “gathering information and monitoring developments”, and had set up a working group to “review these developments”, given that the bulk of its investors are from the non-Scottish UK.
Dundee-headquartered Alliance Trust says it has a “clear duty of care” to ensure its shareholders are not disadvantaged by a pro-independence vote. It has been “working closely” with the UK, Scottish and European governments to this effect.
It says the referendum “should be seen as more akin to a starting gun than to a finishing post”, in that a “yes” vote would merely kick-start a lengthy negotiation process between the relevant authorities.
“The consensus seems to be that there will be time following the outcome of the independence vote in September to do something. We think that is right,” says Mr Elliott. “Shareholders definitely should not be panicking or selling out, that would be wrong. But it should be at the back of their minds.”
Alex Barr, manager of the Aberdeen Private Equity fund, sums up the mood of those who are relaxed about the fate of Scottish investment trusts, even if the pro-independence campaigners win the day.
“You have to put yourselves in the shoes of the Scottish government. Are you going to completely f**k up an important industry? A reasonable view has to be that you don’t tinker with the system,” he says.
Indeed, Mr Elliott believes independence, if it transpires, could prove beneficial for the sector, creating scope for a future Scottish government to sculpt a “more welcoming regime” for investment trusts, particularly in terms of tax.
This could allow Scotland to replicate the recent success of the Channel Islands, which now house 26 per cent of investment trust assets, Mr Elliott muses. It could end talk of skittish Scottish trusts heading south, for the time being at least.
This article has been amended to reflect reader comments
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