Boards are flexing their muscles

There is some dispute over whether it was Winston Churchill or John Maynard Keynes who first proclaimed: “when the facts change, I change my mind”. Either way, it remains the perfect put-down of critics complaining that someone has changed their position or performed a U-turn. Shouldn’t we all be flexible in our thinking as the world changes around us?

This is a conversation that resonates particularly loudly in the investment companies sector. Several commentators have noted a steady increase in changes of management at investment companies over recent times, a trend that seems to have accelerated during the Covid-19 pandemic. And fascinating research just published in Investment Week highlights how this has been part of an increase in corporate activity more broadly, with more funds also changing their investment policy, pursuing mergers with other funds, or even liquidating.

In a world where it is all too easy to focus on short-term returns and the ups and downs of performance tables, such changes are often characterised as an admission of failure. Surely, only a failing fund would change its manager or overhaul its investment policies?

That is the wrong way to look at this issue. Channelling the spirit of Churchill or Keynes, there is a better question to ask – why wouldn’t a fund change course if the marketplace in which it operates has changed significantly?

This is an area where the strength of the investment company model is striking. In an investment company structure, the fund managers are appointed by an independent board of directors whose fiduciary responsibility is to shareholders rather than the management company. The board is also ultimately responsible for agreeing the investment policy of the fund. What this means in practice is that the board has the option of changing direction if circumstances require it; indeed, they have a duty to keep such changes under regular consideration.

Sometimes, boards will feel compelled to step in because they feel the manager is underperforming. But interventions may be required for more benign reasons too. It may be, for example, that the board appointed a manager with a particular set of skills for the marketplace of the time, but feels a change is necessary because that specialty has become less relevant.

Right now, for instance, there is an active debate in the markets over whether growth stocks have had their day and whether value investing is set for a return for favour. In which case, a manager with a value focus and discipline may now be a better option for some funds.

Boards will not always make the right decision, of course. They may appoint the wrong manager for the prevailing market conditions. They may recommend a change in policy only for the new approach to disappoint. They may even succumb to the dangers of short-termism, chasing returns and table-topping performance.

But that is not the point. Rather, the question that investors should be asking as they decide where to place their trust is whose interests a fund is ultimately run in. In an investment company structure, this is crystal clear – the fund exists to serve its shareholders, not to enrich employees and contractors such as fund managers.

That can be brutal. As boards flex their muscles on behalf of investors, fund managers may find themselves out of a job – the fund may even disappear altogether. Still, investors should not have it any other way. The alternative is to risk getting stuck in the past.