Investment companies and the role of the board

Summer seems a distant memory, as we plough further through Q4 and, dare I say it, towards Christmas with mince pies already in the shops. The level of activity in the closed-ended investment company sector, however, shows no sign of cooling off - unlike the weather. Over the past two weeks, two investment company boards have announced decisions regarding the future management of the company.

Investment companies are governed by company law, unlike open-ended funds. This company structure means that each investment company has a board of directors to represent shareholders. The board plays an important role in terms of setting charges and reviewing investment policy, as well as overseeing and scrutinising the performance of the fund manager and management company.

Schroder UK Growth last week announced the news that they were retaining Schroders as management group. The previous fund manager, Julie Dean, departed Schroders for pastures new in September 2014 after just over a year of managing the fund. The board held a beauty parade of management groups and, following a full evaluation, last week announced that Schroders will be kept as the management group, with Philip Matthews assuming responsibility for the portfolio. The board was unanimous in its conclusion, and furthermore, the management fee was reduced from 0.6% to 0.5% of net assets from 1 November.

The board can also choose to change the fund management group, and that is exactly what happened with British Assets this month, a company previously managed by F&C Investments, who announced its intention to appoint BlackRock as the new management group and to adopt a multi-asset approach. Multi-asset funds are able to invest across the investment landscape and may include equities, bonds and cash. The board has announced proposals to change the investment objective and policy of the fund, replacing a benchmark-driven approach with an income focus and the aim of preserving capital. Lead manager of the fund at BlackRock will be Adam Ryan and the fee will remain at 0.4% of total assets.

Alan Brierley, investment company analyst at Canaccord Genuity, applauded this decision in his research note last week, regarding these proposals as “an exciting and welcome development”. Brierley writes that, after a bull market lasting five and a half years, “challenges lie ahead and in this environment, those companies with highly diversified portfolios, lower risk profiles and greater defensive characteristics have obvious appeal.”

Proposals from a board such as these are not only due to performance or stock market issues. They can be the result of a board looking to meet demand due to external changes. George Osborne’s pension changes are likely to bring into focus the unique advantages investment companies have in delivering a higher or growing income. The AIC has welcomed the decision to allow pension savers freedom over how they take their pensions and draw an income in retirement. The AIC’s ‘'Freedom in pensions’ series has looked at how investment companies can be used to build a long-term pension portfolio and to deliver a higher or growing income in retirement.

According to Simon Elliott, Head of Research at Winterflood, the proposals by the board of British Assets to move to a capital preservation and income focus approach is reflective of an industry taking steps to meet a growing investment need following the Chancellor’s pensions’ revolution. Elliott writes that “these proposals mark an important inflection point in the evolution of investment trusts, and the sector’s attempt to meet changing investment needs”.

An investment company board can undertake a review of the fund manager and the fund management group when it is considered to be in the interest of the company’s shareholders, due to both internal and external influences. And, whether the fund remains where it is or is moved on and its objective altered, the fact that an independent board can evaluate the manager’s performance is an attractive feature for investors. We believe these pension changes represent an important opportunity for the investment company industry and it’s good to see one company already positioning themselves for a brave new pensions world.