Boards can add value by changing the manager, lowering fees or instigating mergers

Aunique advantage of investment trusts versus other types of funds are their independent boards of directors which offer additional oversight for investors and have a legal responsibility to protect shareholders’ interests. The role of the board is both vital and varied.

It ranges from scrutinising the performance of the fund manager and negotiating charges to proposing mergers between trusts and firing underperforming investment managers.

Basically, investment trust boards are tasked with fighting for the interests of shareholders and, in recent years, they have been very active in negotiating lower fees for investors while leading the way on governance.

COMPLEMENTARY SKILLSETS

Investment trusts are listed companies, so they must comply with stock exchange rules and appoint a board of directors who are independent of the investment manager and legally responsible for protecting the interests of the trust’s shareholders, which ultimately means replacing the manager or closing down the trust if performance is poor.

The board’s role is a multi-faceted one, so an effective board should comprise individuals with specific skillsets and strengths that complement those of fellow directors. Robert Jeens (pictured), chairman of Allianz Technology Trust (ATT), informs Shares that boards help get the best deal for shareholders. He says they are ‘typically ordinary people investing for their retirement and you are their voice.’ Jeens adds: ‘Boards have to think of themselves in that way.’

In terms of board composition, the experienced Jeens believes trusts need to assemble ‘a group of people that’s not too big, because that would cost too much money, and not too small because you would not have enough skills’.

Most large trusts have a board of five or six people, yet Jeens relays that on the smaller trusts he has been on, ‘we’ve managed very satisfactorily with three or four, but you’ve got to be conscious of the size of your company and what’s affordable and sensible’.

Annabel Brodie-Smith (pictured), communications director of the Association of Investment Companies, says that traditionally investment trust boards have had a mix of skills in areas like asset management, accountancy and legal skills but notes increasing demand for people with marketing and distribution experience.

Elisabeth Scott (pictured) chairs the AIC and India Capital Growth Fund (IGC). She is also a non-executive director of Allianz
Technology Trust and has just joined the board of JPMorgan Global Emerging Markets Income (JEMI).

Scott argues independence from the management company is what differentiates the board of an investment trust from an open-ended fund.

Her fellow AIC board member Gay Collins (pictured) is also JP Morgan Global Growth & Income’s (JGGI) senior independent non-executive director and a non-executive of Dunedin Income Growth (DIG). Collins says a board needs a mixture of input. ‘You need one that has been an investment manager and someone who understands about accountancy, because the board needs someone to chair the audit committee.’

Scott believes the board needs to have a diverse range of experience but it is ‘not just the very obvious diversity such as gender and ethnicity, at least as important is diversity of thought’.

MERGERS & MANAGEMENT CHANGES

One of the board’s most important roles is scrutinising the portfolio performance of the trust for which they are responsible. ‘At times performance isn’t going to be good,’ concedes Scott, ‘and the board’s role is to constructively challenge the manager and detect if there is any mission creep or sliding away from the style the manager has adopted.

‘If you set out your stall as a value manager and value is doing badly, what the board doesn’t want to see is suddenly the value manager becoming a growth manager.’

Gay Collins says the boards she sits on grill the fund management team on what their stock selection has been like, changes they have made and where the outperformance has come from.

‘We don’t make decisions on gearing (borrowing to invest) on either of the trusts I’m on, but we discuss what the managers’ thoughts are on gearing.’

Scott regards mergers, which have been racking up in the investment trust universe, as ‘a classic example of boards thinking about how can we get better value for our shareholders’. The board might consider their trust to be sub-scale, so it would be better to merge it with another one, or performance isn’t up to scratch, so somebody else could do better.

‘That’s always going to be driven by the board and the selection of a new manager is always going to be something for the board to decide upon,’ says Scott.

In 2020 the chairman of Temple Bar (TMPL) Arthur Copple led the process of changing the investment manager from Ninety One to RWC Asset Management after poor performance and the departure of a key member of the team due to ill health.

Explaining the process Copple noted that having decided to stick with a value approach, he and the board received 19 proposals, which were whittled down to six, then finally down to two.

‘Then after that we had to replace our AIFM (alternative investment fund manager), our company secretary and our fund administrator and again that is an arduous selection process. It is a question of devoting the time and resources and we had external help, without which the whole process would have been impossible,’ said Copple.

Building trust and a good relationship with the investment manager is a role highlighted by Jeens. ‘These people have lots of other funds to run as well and you want them to think about you more than the other guys,’ he says. ‘And you do that by essentially combinations of charm and dare I say, making sure they get a reasonable fee for the job as well.’

Setting fees is a key role for boards, which should aim to strike a fair balance between minimising shareholders’ costs and ensuring the investment manager is appropriately incentivised. In 2021, boards were active in negotiating fee reductions on shareholders’ behalf with a total of 31 investment companies making fee changes.

Jeens says: ‘When I joined the board of Allianz Technology Trust, there wasn’t a tiered fee structure. Allianz Technology Trust has now put in place tiers so that for the market value of the trust over £1 billion, the management fee is 50 basis points, a very good rate for a specialist fund such as this. And it is working into those lower fee tier structures that brings the fees down.

‘The overall TER (total expense ratio – also known as ongoing charges) of the trust has come down from 80 basis points in 2020 to 69 basis points in 2021 and we have also worked on the performance fee, which has come down.’

MANAGING THE DISCOUNT

Boards also have the ability to smooth the payment of dividend income by putting aside surplus revenue as reserves, and should monitor closely the discount/premium to net asset value at which their trust’s shares trade. Elisabeth Scott says Allianz Technology Trust’s board has been very involved on this front.

Not long ago, before the recent technology sell-off triggered by inflation and rising interest rates, Allianz Technology Trust traded at a premium and was issuing shares, but now, ‘we are trading at a discount and buying back shares’, points out Scott. ‘The board is very involved in that discussion and setting the parameters around those policies, even talking to the brokers and the management company to make sure those policies are being carried through.’

Scott also recounts how people were ‘really concerned about India’ at the start of the Covid crisis which was reflected in a large discount on India Capital Growth Fund.

The discount had widened to about 40%. It also had a continuation vote coming up. The board needed to do something about it – winding up the trust at the share price as it was then was not in the interests of anybody, she recalls.

But the board met ‘an awful lot’ with the manager, lawyers and brokers before introducing a redemption facility that ‘first kicked in at the end of 2021, allowing any shareholder to redeem their shares at a certain discount to net asset value. ‘The discount narrowed considerably and when we had the redemption facility at the end of 2021, we saw less than 15% of the shares being redeemed, which we felt was a very good outcome.’

Gay Collins cites the transformation of JPMorgan Global Growth & Income as a good example of a board driving through positive change. Until 2016, this was a growth trust called JPMorgan Overseas offering miniscule income and trading at ‘about a 16% discount’ when Collins joined the board in 2012.

The wide discount was cause for concern and the board ‘recognised everyone wants income and we weren’t giving much income’, says Collins. ‘We wanted to grow the trust, and when you are trading at a discount you can’t grow. You are constantly buying back shares, not issuing shares, so we as a board decided to change from being a growth trust to a growth and income trust.’

The board decided not to change the fund management team and not to change their process, but it did elect to boost the income through dipping into its significant revenue reserves.

In 2016, the trust was renamed JPMorgan Global Growth & Income and ‘we spent a lot of time thinking about the messaging’, explains Collins. Within six months of the relaunch, JPMorgan Global Growth & Income was trading at a premium and was starting to issue shares, recalls Collins. Today, ‘we are in the process of merging with The Scottish Investment Trust, our performance has been amazing and the whole outlook for the trust is totally different’.

Shareholders are happy as a trust that was going nowhere has since outperformed its benchmark and peers while delivering rising dividends; the impending merger with The Scottish will almost double its assets under management to £1.3 billion and reduce ongoing charges.

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