Horizon - a cautionary tale for investors

Interest in trust companies is flying high at the moment, with many investors attracted to the annuity income that they tend to generate, and their relative resilience through a period of downturn. 

For over 20 years from the 1980s, the fiduciary business enjoyed a golden period where it seemed that anyone who had the presence of mind to open for business could do so with little difficulty, and could expect to reap the rewards of a very healthy steady income for many years to come.  And many did just that - in Jersey alone there were hundreds of trust companies established, ranging from small 2-3 man bands, to large integrated fiduciary businesses. However, increasing regulatory complexity and stiff market competition, combined with the current economic turmoil being experienced in many of the world's key markets, mean that whilst opportunities undoubtedly exist for the better fiduciary groups to build phenomenally strong businesses we are starting to see clear winners and losers emerge. 

18 months or so ago Horizon Group was a successful multi-jurisdictional trust company employing around 40 people and with US$1 billion in assets under management.  Since then, things have gone badly wrong, with the company having ceased trading and the only glimmer of light being the fact that Jersey Trust Company and Spearpoint have agreed to take on large parts of its business.  This will save 12 jobs in total, with 9 of the Horizon employees moving to JTC, and a further 3 to Spearpoint - undoubtedly a big comfort to the individuals concerned, but nonetheless a sorry end to a business which was once proud to boast of its market credentials.

Whatever the reasons for the dramatic decline of Horizon's business, its experience should be seen as a cautionary tale for investors.  The fiduciary business is a competitive and difficult one.  The fact that a company built a successful portfolio of business in the boom years cannot necessarily be taken as an indicator that it will be capable of withstanding a prolonged global downturn and an ever tougher regulatory environment, and investors really must have a very solid understanding of what they are acquiring, and the fundamental soundness of the business.  There are numerous examples of companies which turned in a healthy profit year after year when times were easier, but which now find themselves in unfamiliar territory and with management teams who are ill-equipped to deal with the changed circumstances.

Market consolidation offers opportunities to buyers who know what they are letting themeselves in for (and we can see emerging some who are particularly adept at acquiring stressed businesses in this market), but there are dangers lurking for those who are blinded by past success and an eagerness to jump on the fiduciary bandwagon because of its historically strong performance.  There will undoubtedly be more winners and losers to emerge in the coming months, so the key for investors is to understand what makes a winning formula in this new environment.