The Investment Research Partnership

Jersey Evening Post

November 2004.

As part of the highly disciplined approach which Jersey-based trustees must now adopt, there is a requirement that trustees should demonstrate they have agreed investment guidelines for each portfolio under their ‘ownership’ where the trustees have appointed investment managers on a discretionary basis, and agree a timetable for periodic reviews (usually three or six months).

Additionally, the trustees must also have in place a structure to monitor ongoing performance. Although this may seem obvious to trustees now, this has not always been the case, and there may still be situations where investment managers are working under general, non-descript mandates such as ‘capital growth’ or ‘balanced’. The mandate must now be more specific, and include a ‘benchmark’ which reflects the trust investment objective. In some cases this may require a composite benchmark which reflects the anticipated balance between the various asset classes (e.g. bonds, equities, cash) and sub classes. This should form a major part of the agreement between the trustee and the appointed manager.

The whole process, from initially appointing investment managers, to agreeing an investment policy, and monitoring performance on an ongoing basis, is the responsibility of the trustee and must be rigidly adopted by them, and documented as such. While the trustees may wish to include the settlor or beneficiaries in the periodic reviews, or at least in the initial selection process, the selection and monitoring of the investment manager or managers is entirely the trustees responsibility. Registration

For selection of Jersey-based investment managers, some comfort can be taken in that investment managers in the Island must now undertake stringent registration requirements, and are subject to ongoing regulation by the Jersey Financial Services Commission, under the terms of the Financial Services (Jersey) Law 1998. The FSC’s website, www.jerseyfsc.org provides a comprehensive guide to registered investment managers within the Island.

While trustees are not expected to be investment experts, they must be able to demonstrate (that is have recorded on file) that specific benchmarks have been agreed, and that they are monitoring both the structure of a portfolio against the agreed mandate, and the ongoing performance relative to the benchmark performance. In addition to this, they must have a mechanism in place to take action if performance is failing. To facilitate this, a guideline for tackling poorly performing portfolios should be included in the trust company’s procedures manual. Where a portfolio has underperformed on a regular basis (which if regular monitoring has been actioned should not happen very often) there should be a standard procedure for contacting the investment managers, discussing what is going wrong and how it can be resolved. If a course of action to remedy the situation cannot be agreed upon, then the trustees should look to appointing alternative investment managers. Again, it is essential that all this is well documented.

Many trust operations in the Island have established procedures for in-house investment monitoring; indeed some of the larger trust companies have dedicated teams to undertake this process. There are some also companies to whom this function can be outsourced.

Fenchurch Data is one such organisation. They offer services to trustees to review portfolios, for example where there may be questions relating to the performance, asset allocation or risk profile of a portfolio. They can also provide independent assessments in ‘beauty parade’ scenarios and an ad hoc reporting facility which may be used by the larger trust companies to monitor their own in-house reporting function.

Although the increase in regulation and compliance has added considerably to the workload of Jersey’s many trust companies, the close monitoring of investment portfolios should be an essential part of a trust company’s own risk management responsibilities, as a new generation of sophisticated and litigious-minded beneficiaries leave trustees increasingly as risk.

There have already been a number of cases where trustees have been attacked, mainly by beneficiaries dissatisfied with the management and performance of a trust’s assets. One example dates back to the late 1980s, when the Nestlé family sued a bank’s trustees for the latter’s failure to review a trust’s investments over a number of years. Although the bank won on a technicality, the judge condemned their failure to review the trust’s holdings. For the large corporate trustees especially, reputational risk is an added concern in such situations.

This case pre-dates the Trustee Act 2000, which requires every trustee in England and Wales to review their actions and investment policies. A Jersey trustee should, however, follow this best practice policy even though these rules do not directly apply to them.

Where poor performance or mismanagement leads to litigation, companies such as Fenchurch can also provide expert witness support in the ensuing litigation. This is a course that trustees and investment managers would hope to avoid and whenever possible they will aim to settle before such action is needed. However, experience has shown that this is not always possible and drawn out litigation can ensue.

Needless to say, these extra responsibilities add not only to the workload for administrating a trust, but also to cost. However, a prudent trustee must be responsible for monitoring the ongoing performance of assets of which they are the legal owners, and a reasonable cost for such a process will ensure that both trustees and beneficiaries positions are protected and will ultimately add value to the service provided by the trustees.

For more information on the services we provide please e-mail us at info@tirp.co.uk or telephone us on 44 (0)1425 620001