In times of economic prosperity, beneficiaries were less prone to challenge trustees over trust investments. Over the past few years, those challenges have become increasingly likely in an environment where losses and limited returns have been more prevalent.
It is, therefore, essential that trustees understand their investment powers and duties. The Trusts (Jersey) Law 1984 (the Trusts Law) and typical modern Jersey discretionary trust instruments give trustees wide investment powers, subject always to the duty to exercise those powers in the interests of the beneficiaries and in accordance with the trust terms.
The trustee’s duty
The Trusts Law stipulates that trustees must act ‘with due diligence, as would a prudent person, to the best of his ability and skill, and observe the utmost good faith’.
In the English case of Learoyd v Whiteley (1887) 12 AC 727, the court characterised the trustee’s obligation with regard to investment of the trust assets as a duty to take ‘such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide’.
To satisfy that duty, trustees need to adopt an appropriate investment policy, which entails identifying the purpose of the trust, familiarising themselves with their investment powers and duties, and devising investment objectives and a risk model, taking account of the suitability of investments, diversification and investment management needs.
The suitability of asset classes will inevitably be determined by, and tailored to meet, the particular purposes of the trust in question. Factors dictating the suitability of particular assets might include taxation treatment, religious prohibitions, ages of key individuals, attitude to risk, liquidity, and the need to balance capital growth and income return.
As a general rule, the courts will not attribute fault to trustees simply because a specific trust investment has not performed as hoped, with loss to the trust fund. In the English case of Nestlé v National Westminster Bank (1996) 10 TLI 112, it was held that a trustee who invests in a portfolio of investments designed to spread risk is entitled to be judged by the performance of the portfolio overall, rather than by reference to individual parts.
Diversifying
The Trusts Law does not include an express duty to diversify trust investments, and, while it does impose a duty on trustees to preserve and enhance the trust assets, this duty may be excluded by the trust terms.
However, it is questionable whether not diversifying – e.g. retaining investments in a single asset class, especially if high risk in nature – can be consistent with the trustee’s irreducible duty of prudence.
Delegating
Unless the express terms provide otherwise, the Trusts Law empowers trustees to delegate the management and investment of trust property. When should that power of delegation be exercised?
The English case of Cowan and others v Scargill and others [1985] 1 Ch 270 sets out the general principle. If trustees do not possess investment expertise, it is their duty to seek advice on such matters, and, when receiving that advice, to act with the same degree of prudence as is imposed on them in relation to trust investments.
The Trusts Law imposes a duty on trustees to ensure that they only delegate to investment managers they consider to be competent and qualified, and only forgives a trustee from liability for losses arising from delegation of powers if the delegate was appointed ‘in good faith and without neglect’.
Accordingly, trustees must be reasoned in their deliberation and selection process before engaging investment managers or other delegates. Further, it is not enough that trustees simply appoint competent and qualified delegates; there is a continuing duty to monitor them. It is, therefore, essential that trustees frequently review an investment manager’s performance, and demand regular performance reports. If the investment manager underperforms, it may be necessary to revisit the appointment.
Where trusts have incurred losses or investments have underperformed, it is essential that trustees can demonstrate they have acted prudently, and in accordance with their duties and the trust terms. Trustees must also demonstrate that they have made reasoned decisions based on the formulation, implementation and monitoring of an appropriate investment strategy.