The role of the board

Journalists love writing headlines containing phrases such as “shareholder revolt” and “investor rebellion”, but in the case of the investment company sector, this sort of story can sometimes give the wrong impression. You might think that a run-in between an investment company and its shareholders is indicative of some sort of wider problem in the sector – in fact, these incidents absolutely underline one of the strengths of closed-ended funds.

Over the past month, we’ve seen two high profile examples, with Alliance Trust announcing a raft of reforms following a campaign led by a group of its shareholders, and Electra Private Equity announcing that a shareholder activist group is trying to win representation on the board of the fund. These cases may be difficult for the funds in question – and this isn’t the place to judge the rights and wrongs of each one - but they do speak to an important feature of the investment company sector.

Whose side are they on?

Indeed, the structure of an investment company is one the sector’s unique selling points. These funds are stock market-listed companies that must adhere to company law just like any other. In particular, they must appoint independent boards of directors, whose jobs include appointing an investment manager – and holding this manager to account.

That’s a very different arrangement to an open-ended fund, which is typically the creation and intellectual property of the investment manager that launched and runs it. An investment company’s board has the right to make changes to the fund’s investment management arrangements if it thinks doing so is necessary – in fact it has a duty to act if shareholders’ interests aren’t being properly served

Equally, if investors aren’t happy with the board’s approach they have the right to challenge the directors – at the annual general meeting of the fund, for example, or through emergency shareholder resolutions. They can propose reforms or push for new shareholder representatives to be appointed.

It’s when this happens that the media starts running stories about confrontations and showdowns – but public rows of this sort are relatively unusual. What they point to, however, is the healthy culture of most investment companies, where independent directors are working constantly to safeguard shareholder interests, very often behind the scenes.

Pushing for action

Leading investment company analysts think that, in the months ahead, we may be in for more of the public disputes of the type seen at Alliance and Electra recently. They’re urging investment company boards to take action to head off shareholder activist groups – to tackle issues such as the fund’s shares trading on too wide a discount to the value of its underlying assets.

From the perspective of investors, however, this is a win-win situation. To put it bluntly, either directors stand up on their behalf, or those directors will find themselves under pressure from shareholders unhappy with their failure to do so.

Either way, investment company shareholders can count themselves lucky. When a collective fund’s performance is mediocre, or downright disappointing, investors often feel they have no option but to lock in the downside by selling up and moving to another fund – because generally they can’t see any catalyst for a change in their fortunes. In an investment company, by contrast, the independent board and the wider shareholder base can provide that catalyst.