What is ahead for investment company boards?
Warren Buffett said: “In the business world, the rear-view mirror is always clearer than the windshield.” It’s sometimes hard, if not impossible, for fund managers to know what they face in the future and how their portfolio should be positioned.
One of the strengths of the investment company space is that the fund manager is not alone but works together with an independent board of directors. The board’s role is to look after shareholders’ interests, and the directors set the strategy and direction for the company. Another key role is to oversee the investment manager and performance, and provide an external view to support or add a different perspective to the manager. Boards set the gearing policy, the discount or premium strategy, and monitor shareholder communication and opinion.
Of course, this is all done in consultation with the manager, and ideally managers and boards work effectively together. Diverse Income Trust manager Gervais Williams explains how he finds his board helpful: “The thing about the board is they bring together, as a body, a lot of continuity. There is real duration to that; it gives you a chance to talk to the board about the more unconventional ideas. It is more of a two-way conversation.”
Of course, the relationship between the board and manager can sometimes be more difficult.
If a board is not happy with a manager’s performance over the long term, a new manager from the same group could be appointed to manage the company. Or boards can dismiss the existing fund manager group and appoint a new one to run the company. This happened last summer when Baillie Gifford UK Growth took over the management of a company from Schroders.
One area where boards have been particularly proactive is fees, and they have demonstrated their benefit to shareholders in this area.
Since 2013, 142 fee changes have taken place, which represent over a third of the industry. Of these, 47 have introduced tiered fees, so that as a company grows in size, people benefit from reduced fees.
Another trend has been the removal of performance fees, particularly in the retail-orientated sectors, with 37 companies removing these fees since 2013. The impact of the fee reductions for investors can be considerable and means more of their money invested is working for them. For example, City of London Investment Trust recently reduced its fee to 0.325 per cent of net assets per year, which was a reduction of around 10 per cent from the previous fee arrangement.
This fee is remarkably competitive for an actively managed company in the UK Equity Income sector, which has the longest record of consecutive dividend increases for an investment company – 52 years.
Boards can have considerable influence over the strategy or structure of an investment company. This is particularly important when the strategy needs changing, and JP Morgan Global Growth & Income is a good example of this. The company was trading on a wide discount and needed to appeal to more investors post-RDR.
JP Morgan Global Growth & Income director Gay Collins explains: “Part of this relates to size and liquidity, and when we were a sub-£200m market cap trust, we were going nowhere. The decision to move to be a total return focused trust through increasing the distribution policy while retaining the same fund manager and style was a watershed moment for the trust.” This change of strategy brought impressive results: “This decision resulted in the trust moving from a 15.5 per cent discount to a premium, and then issuing shares. Our shareholder register changed significantly, with several marginal institutional shareholders being replaced by private client brokers, as well as private individuals.”
More recently, Aberdeen Standard Asia Focus was overhauled at the board’s request, with Hugh Young named lead manager, a reduction in the number of holdings and a rebasing of the company’s fees.
The name was changed from Aberdeen Asian Smaller Companies to further emphasise “the drive to identify and invest in the small cap companies that can become the investment heroes of tomorrow”. In addition, two highly experienced directors were appointed to bring fresh thinking to the board.
And the merger of two UK smaller companies trusts – Dunedin Smaller Companies and Standard Life UK Smaller Companies Trust – was brought about after the boards identified an opportunity to build a bigger fund with more liquidity and lower costs for investors.
So what is ahead for investment company boards? Well, one trend is the increase in the number of female directors. Progress on this issue has been made but there is clearly room for more. JP Morgan Cazenove commented in its annual review: “We expect a continued move towards better gender diversity but also expect diversity on other areas to be a focus, for example having fewer directors whose background is corporate finance or investment management.”
Going back to Buffett, “the windshield” may be unclear but boards are broadening their expertise to face the road ahead.
Annabel Brodie-Smith is communications director at the Association of Investment Companies