Shareholders having their say

Even the most hard-hearted of investors and advisers will surely have some sympathy with Alasdair McKinnon, the manager of Scottish Investment Trust, which has in recent days announced a merger with JP Morgan Global Growth & Income. Subject to shareholder approval, the deal will see the fund, first launched in 1887, surrender its independence; McKinnon, who has run Scottish since 2015 and been with the company since 2003, will lose his job.

Still, there is little room for sentiment in the investment business. Scottish’s investors will no doubt be sad to say goodbye to an institution that has traded proudly for more than 130 years, but they will also be focused on returns. The fund has not performed badly under McKinnon’s leadership – dividends have been particularly strong – but it has lagged both its benchmark and the top-performing funds in the sector.

In fact, Scottish’s announcement is another reminder of the unique characteristics of investment companies. Unlike any other investment product, an investment company is a stock market-listed independent business in its own right, rather than a creation of an asset manager’s marketing department. The distinction is crucial because, as an independent business, an investment company must have a board of directors. And they must behave in accordance with their legally binding fiduciary responsibilities.

What this means in practice is quite simple. The board must be independent – and it must focus on the best interests of shareholders at all times. In other words, the investment company must be run for the benefit of its investors, rather than any other party, including the fund manager.

In Scottish’s case, the board has met those responsibilities in public view. Four months or so ago, it announced the appointment of Stanhope Consulting to lead a strategic review of the fund. Stanhope looked at retaining the existing structure of Scottish, appointing a new manager, or merging with another fund. The agreement with JP Morgan Global Growth & Income is the culmination of that process.

Advisers and investors with exposure to investment companies should be heartened by this tale. There was no particular clamour amongst Scottish’s investors for wholesale changes at the fund; nor had it received particularly challenging criticism from investment company analysts. Nevertheless, the board felt it had a duty to explore whether investors might be better served by a different approach – and to act on the advice it was given, even though it meant some difficult decisions.

In fact, the shake-up at Scottish is just the latest in a flurry of such interventions by investment company boards. Over the past five years, we have seen directors flex their muscles in all sorts of ways, from insisting on fee reductions to demands for funds to introduce new measures to control valuations. And we have seen a growing number of outright manager changes too.

There was a time when a board role at an investment company looked to be a cushy number – an opportunity to collect a decent fee with no need to rock the boat other than in exceptional circumstances. Those days have gone. Today’s investment company boards are ready and willing to stand up for shareholders. And investors in investment companies are better off for it.