Have your say

Who determines how an investment company is managed and run? Ultimately, it’s the investors.

One unique feature of investment companies, in contrast to other types of collective investment vehicles, is their governance structure. An investment company is owned by its shareholders, who enjoy the same rights as their peers at any other stock market-listed company – to appoint an independent board, for example, and to have their say on key decisions.

That’s a powerful idea. The investment industry’s usual modus operandi is to sell products and services – investors can choose whether or not to buy what’s on offer, but they have little or no say in how it operates thereafter. Investment companies, on the other hand, operate as mini-democracies – in theory at least.

However, investors’ rights are only useful if investors are prepared to exercise them. And many are not – they don’t take advantage of the opportunity to hold investment company boards and managers to account. They don’t vote on company resolutions or attend company meetings, for example.

There are lots of reasons for this, but one explanation is that investors often hold their investment company shares through an intermediary – an online investment platform or a financial adviser, say. Where this intermediary holds the shares on the investor’s behalf, it may not make it easy for the shareholder to exercise their rights; the intermediary may not even keep people informed of forthcoming votes on key issues.

One organisation trying to do better in this regard is the investment platform interactive investor. Last year, it changed its systems so that investors automatically receive shareholder notifications from companies where they hold shares. Only those who opt out of this system don’t get told when a vote or shareholder meeting is imminent. That’s very different to the practice at most platforms, where investors typically have to opt in to such a set-up.

The impact of the change of policy at interactive investor undermines those who argue that investors aren’t particularly interested in becoming more engaged. Since the platform moved to an opt-out process, the number of votes it has processed on behalf of investors has increased by 30%, albeit from a low base. In other words, when investors know about votes at companies where they have a shareholding, they’re often very keen to have their say.

This is encouraging. Currently, most platforms make it relatively easy for investors to vote; Hargreaves Lansdown recently announced the introduction of digital voting for its customers. But only at interactive investor is the default setting for investors to be automatically told about all votes in which they could participate. Elsewhere, investors have to make much more effort to find out for themselves.

It is to be hoped that other platforms now follow interactive investor’s example. Its policy applies to all listed companies – not just investment companies. But for investment company investors, shareholder democracy is especially important; it’s one of the things that sets closed-ended funds apart from their open-ended counterparts.

For investment company boards, of course, increased investor engagement will not always be a comfortable experience. Inevitably, investors tend to become more active when they’re concerned about the company; some of these conversations will be difficult.

However, that’s beside the point. Investment companies have a fiduciary responsibility to behave in the best interests of their shareholders. For investors, that provides some important protection that isn’t available from other funds. And their rights as shareholders give them a valuable way to make their voices heard.