Ben Yearsley, joint owner of Fairview Investing and a member of our Investment Committee, and I recently met with two fund managers as part of the ongoing monitoring of our chosen managers.

The first was Laura Foll of Janus Henderson, who is taking over from her long-standing co-manager James Henderson when he retires next year. Laura has worked alongside James since 2011 and has been closely involved with the Law Debenture investment trust that Janus Henderson have managed for many years now. This is therefore very much a planned succession rather than a change of direction and we expect business to continue as usual.

Interestingly, Janus Henderson was taken private this year by an investor group led by Trian Fund Management and General Catalyst, alongside other strategic investors. Trian, Nelson Peltz's investment firm, was already very familiar with the business, having been a significant shareholder in Janus Henderson since 2020, owning just over 20% before the transaction.

Laura also co-manages the Lowland Investment Company and the open-ended Janus Henderson UK Equity Income & Growth Fund. Although all three portfolios share elements of the same investment philosophy, they are deliberately different portfolios. Lowland has a particularly strong exposure to smaller and medium-sized companies, while the open-ended fund provides access to Laura and the team's UK equity approach without the structural characteristics of an investment trust.

Our preference is Law Debenture, not least because of its unusual structure. Alongside its investment portfolio, the company owns Independent Professional Services (IPS), a collection of businesses providing pension trusteeship, corporate trusts and governance services.

IPS contributes a significant proportion of Law Debenture's income and therefore helps support the dividend. This gives the investment managers greater freedom to invest the equity portfolio for long-term growth rather than simply seeking the highest-yielding shares.

There is another important advantage. Investment trusts can retain some of the income they receive in good years and use those reserves to support dividends during more difficult periods. Open-ended funds cannot do this in the same way and must broadly distribute the income generated by their underlying investments.

Covid demonstrated the difference particularly well. Around two-thirds of UK companies cut or cancelled their dividends in 2020 and total UK dividends fell by approximately 44%. The Janus Henderson UK Equity Income & Growth Fund was inevitably affected, with its income distribution falling, although by considerably less than the wider market. Law Debenture, by contrast, increased its dividend. That ability to smooth income, combined with the contribution from IPS, is one of the reasons we favour the investment trust. Law Debenture has now maintained or increased its dividend for 47 consecutive years and has nearly four years’ worth of dividend cover. It has also significantly outperformed the open-ended unit trust over the last decade, but it does as a result come with greater volatility, partially because of its ability to use leverage. “Volatility is the cost of admission to market returns.” Morgan Housel.

We then met with members of the team at Pershing Square Holdings, the high-conviction investment company created by Bill Ackman and managed by Pershing Square Capital Management. Following on from the income benefits of closed-ended funds highlighted above, Pershing Square demonstrates another advantage of the structure. By moving to a closed-ended model, Ackman created a permanent pool of capital that could remain invested for the long term without having to sell holdings to meet investor withdrawals. Instead, shareholders wanting to exit simply sell their shares on the open market, leaving the underlying portfolio untouched.

The portfolio typically holds between eight and twelve core investments, focusing mainly on large-cap North American companies. The aim is to own high-quality businesses with strong competitive “moats”, predictable recurring cash flows and limited downside — an approach with obvious similarities to the investment style made famous by Warren Buffett.

The comparison extends to Pershing Square’s holding in Howard Hughes Holdings (HHH). Buffett famously took control of the struggling textile company Berkshire Hathaway and gradually transformed it into an investment conglomerate, acquiring other businesses and importantly, insurance companies whose capital and float could be invested for the long term.

Ackman is now pursuing a similar strategy with HHH, transforming what was predominantly a property company into a more diversified holding company. In June, HHH completed the $2.1 billion acquisition of Vantage Group Holdings, a Bermuda-based specialty insurance and reinsurance business. Vantage provides HHH with a significant new source of insurance capital and float that can be invested for the long term, while HHH’s wider equity capital can increasingly be used to acquire and develop other businesses.

HHH has its roots in the original Howard Hughes business empire created by the famous aviator and industrialist, who assembled a sprawling collection of businesses and investments. There is therefore an interesting historical parallel with what Bill Ackman is seeking to do today: use HHH as a platform from which to build a broader investment conglomerate.

*Numbers taken from Morningstar/AIC/FE Analytics

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Comments from James Scott-Hopkins, Founder of EXE Capital Management.

The views are those of the author only.

The above does not constitute a recommendation to buy the funds or specific assets and guidance should be sought from your adviser as to the suitability of the fund for your portfolio. The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

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