David Prosser discusses how investment company boards serve the interests of shareholders.
Turkeys don’t vote for Christmas, right? Tell that to the board of Acorn Income, which has just announced to shareholders that it is recommending they agree to the closure of the investment company. Effectively, the fund’s directors are telling shareholders to put them out of the job – along with Unicorn Asset Management, which manages most of the investment company’s portfolio.
Why would the directors of the company behave in this way? Very simply, because they believe that a liquidation is the course of action that will best serve the interests of shareholders. As such, it is their legal duty under fiduciary law to recommend a wind-up.
Investors will be given the option of receiving cash or transferring their holdings into Unicorn UK Income, an open-ended fund with a similar mandate to Acorn Income, so it is possible that Unicorn will retain some of the investment company’s £100m or so of assets under management. However, it is likely to lose a good chunk of the fee income it has been earning from Acorn Income. And the investment company’s directors will no longer have a role.
The board made its recommendation after consulting with shareholders. Some apparently said they were keen to maintain an exposure to the portfolio that Acorn Income has built; hence the option of a rollover into Unicorn UK Income, which holds many of the same investments. Others said they wanted a cash exit, ideally at a price close to the value of the fund’s assets, rather than at the chunky discount at which its shares have been trading in recent times.
All of which is a reminder of how investment companies are a very different type of investment vehicle. Uniquely, these funds are constructed as publicly-listed companies, with all the duties and responsibilities that brings in terms of shareholder rights. Above all, an investment company – like any other public company – must be run with the interests of shareholders front of mind, even if that sometimes means taking decisions that directors might find unpalatable or even personally costly.
This is a conversation that can sometimes sound rather theoretical – and even a little pompous. But then think about all those billions of pounds locked up in other types of investment fund, where the investment manager continues to earn chunky fees year after year despite delivering disappointing returns. In those funds, there is no board to hold the managers to account. And investors are stuck between a rock and a hard place: either they sell up, effectively cashing in those disappointing returns, or they stick with it, hoping performance will sometimes turn around.
One of the reasons that the asset management industry – and financial services in general – struggles with its reputation is a lack of accountability. Too often, investors feel badly served by investment products that carry high fees but do not seem to deliver what is promised – and in such cases, there is often little they can do.
Investment companies, in this regard, are a breath of fresh air. There is no guarantee that an investment company will outperform another type of fund. But what you do get as an investor is a legal structure where your rights are paramount, rather than feeling you’re stuck with a product run in the interests of its provider.