For many investors, the person running an investment trust is a key part of the reason they choose it. They may be attracted to a fund manager’s impressive track record, contrarian style or the years of experience they bring.

What many investors fail to appreciate is that there’s someone sitting above the fund manager overseeing the investment trust. That’s the board of directors. They play a very important role which we’ll now discuss.

WHAT DOES THE BOARD DO?

Unlike open-ended funds (unit trusts and Oeics), investment trusts are run according to company law. They have an independent team charged with overseeing the running of the vehicle.

The board comprises a chairman, an accountant and various directors of different skills, who will ensure the manager fulfils his or her mandate and acts in the best interests of shareholders.

James de Sausmarez, director of investment trusts at asset manager Janus Henderson, says: ‘The board challenges and questions, they ask why a manager is doing what they’re doing, and I think managers enjoy the interaction.’

Crucially, the board also has the power to sack the fund manager if they feel he or she is not performing.

THE BOARD IN ACTION

In February this year Miton fund manager Gervais Williams was removed from running Investment Company (INV), an investment trust. He and colleague Martin Turner had managed the tiny trust, which has just £17m of assets, since 2013. The board appointed stockbroker and investment manager Fiske, saying there was a ‘strong commercial rationale’ for the change.

Back in November 2016, the board of BlackRock Income Strategies appointed Aberdeen as its new management company following a spell of mediocre performance under the leadership of BlackRock.

The latter had been in charge for the trust for less than two years and was originally brought on to revitalise the product when it was called British Assets.

WHEN WOULD A BOARD DEMAND CHANGE?

James Budden, marketing director at Baillie Gifford, comments: ‘While the majority of mandates don’t move, sustained periods of underperformance, issues at the managing company or the departure of key staff are just some of the scenarios which
can bring change at an investment trust.’

The board also has less dramatic tools in its armoury, with the power to change the mandate of the fund exercised more frequently.

In March 2017 Aberdeen Frontier Markets (AFMC) saw its policy amended from a fund of funds approach to investing directly in equities.

In June 2016, shareholders of Scottish Mortgage (SMT) voted to increase the proportion of assets the trust could invest in unlisted equities from 15% to 25%.

Sausmarez at Janus Henderson says, for the most part, a manager and board will work well together. ‘Common flashpoints might include the level of gearing (debt) a trust has or the market outlook. Share buybacks are the board’s decision and investment holdings are the manager’s,’ he explains.

IS THERE A DOWNSIDE TO HAVING A BOARD? 

Having a board is not without its disadvantages. Any team of highly skilled individuals need paying for their time and that adds to investment trust costs. But Mike Kerley, manager of Henderson Far East Income (HFEL), says the benefits they bring ‘more than compensate for the cost’.

Boards have also been widely credited for keeping fees of trusts lower than their open-ended counterparts.

Trusts are more likely to have tiered fee structures which allow investors to benefit from the economies of scale as a trust’s assets grow. According to the Association of Investment Companies, more than a third of the industry has reduced its management fees since 2013.

Budden at Baillie Gifford says: ‘The board is the shareholders’ voice and can take action to improve things, and that is not the case in the open-ended industry.’

Certainly, the regulator seems to want the open-ended industry to take some guidance from its closed-end counterparts. Last year the FCA proposed new rules requiring funds to appoint at least two independent directors to their board. It said: ‘[Investors] need strong governance to act on their behalf. This does not appear to be happening currently.’

CLEAR SUPPORT FOR BOARDS 

A survey by Winterflood Securities found 51% of investors believe trusts benefit ‘considerably’ from having an independent board – just 2% thought there was no benefit. Respondents said it was ‘part of the added value’ of trusts and ‘an important contributor to outperformance’.

Sausmarez adds: ‘If you’re a private investor it’s enormously comforting to know there is a group of highly qualified, diversely skilled people overseeing the manager. Mutual funds don’t have the same level of challenge.’

Yet while the board has the power to dismiss the manager, the manager has no such reciprocal authority. Board members, who are up for election each year, are answerable to shareholders, who can vote to have them dismissed.

Kerley adds: ‘I don’t have power over the board – they make decisions over and above senior management the same as with any listed company – but they live and die by their ability to meet shareholder expectations.’

The Janus Henderson fund manager meets with the board of his trust on a quarterly basis and enjoys the checks and balances an independent body provides.

They ask Kerley anything from basic questions about his process to more detailed queries about how the portfolio is positioned or why he has chosen particular stocks.

He says: ‘It’s important to have a good relationship and for the board to understand what you’re trying to do. There are times when you do well and times when you don’t, and you need a relationship based on respect and trust so you can explain why.

‘I’ve experienced boards in the past where the relationship breaks down and that’s when it can get quite tense.’ (HB)
DISCLOSURE: Daniel Coatsworth, who edited this article, has a personal investment in Scottish Mortgage.

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