Concentration Risk in the Calder Trust
Calder Trust holds €12m: 65% in shares of an unlisted software company founded by the settlor, 20% in a single commercial property, and 15% cash. The beneficiaries are the settlor's two children, aged 12 and 15, and a charitable foundation that becomes entitled to income after 10 years. The trust deed gives wide investment powers, and the trustee is a professional trust company with no in-house valuation team. Annual distributions of €150,000 are needed for school fees. The settlor has written asking the trustee to hold the software shares through the next funding round and not to sell. The company has no independent valuation; the last share transfer was 18 months ago. A beneficiary's guardian asks why the trust is not diversified and whether the trustee will sell down the software stake. The trustee is also considering appointing the settlor's golf partner as investment adviser.
1. Is holding 65% in one unlisted company consistent with the trustee's investment duties? What steps should the trustee take before deciding?
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There is no absolute rule requiring diversification, but a trustee must act prudently and consider the nature, risk, and liquidity of the portfolio. A 65% holding in a single unlisted company is a serious concentration. It may be tolerable if it is settlor-originated, genuinely unsellable, and balanced by other assets, but the trustee cannot simply accept it because the settlor asks. The settlor's letter is a relevant wish, not a binding instruction unless the deed reserves a power.
Before deciding, the trustee should obtain an independent valuation or at least a defensible valuation methodology. It should review the company's financial statements, funding runway, governance, and any transfer restrictions. It should model liquidity: €150,000 of annual distributions from a portfolio where 65% is illiquid and 20% is a single property is a real risk. It should consider a partial sell-down, a secondary sale, or a negotiated put option, and whether the trust needs a liquidity reserve.
The trustee should also consider the charitable foundation's future income entitlement. That future interest makes income generation relevant now, not only in year ten. The decision and the reasons should be documented in an investment memo approved by the board.
2. What duties apply if the trustee appoints the settlor's golf partner as investment adviser?
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Delegation does not transfer responsibility. The trustee must select the adviser with care, define the mandate in writing, agree fees and reporting lines, and monitor performance. The adviser's relationship with the settlor is a conflict that must be assessed. If the adviser is not regulated or lacks relevant unlisted-company experience, the appointment is hard to justify. The trustee should check whether the deed and applicable law permit delegation, and whether the trustee can rely on the adviser's advice or must still make the investment decision itself.
A prudent process would include requesting references, reviewing the adviser's qualifications and insurance, documenting why this adviser was chosen over alternatives, and setting benchmarks and review dates. The trustee should not allow the settlor to direct the adviser informally. It should also avoid delegating the valuation of the software company to an adviser who may be unwilling to challenge the settlor's expectations. If the adviser's independence is doubtful, the trustee should appoint someone else or obtain a second opinion.
3. How should the trustee respond to the guardian's query about diversification?
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The trustee should treat the query as a governance opportunity, not a threat. It should explain, at a general level, the investment policy, the reasons for the current allocation, the liquidity plan, and how the trustee manages concentration risk. It should not disclose confidential information about other beneficiaries or the settlor's personal affairs. It may invite the guardian to a meeting and record the discussion.
Substantively, the trustee should review whether the guardian's concern is well founded. If the concentration is excessive, the trustee should act rather than merely explain. If a sale is constrained by the company's articles or a shareholders' agreement, the trustee should say so and explain the alternatives it is pursuing. The response should avoid promising a sale if no decision has been made, and it should avoid dismissing the concern as ignorant. A clear, reasoned answer reduces the risk of a complaint and demonstrates that the trustee has turned its mind to diversification, liquidity, and the beneficiaries' different interests.