Sometimes it makes sense to throw in the towel

The headline on the latest monthly review of the investment companies sector from analysts at Winterflood Investment Trusts is eye-catching. “Some turkeys do vote for Christmas,” Winterflood proclaims, on top of an article about investment companies currently recommending to shareholders that they should be closed down.

At first sight, it certainly seems odd that the boards of funds such as abrdn Latin American Income are suggesting to shareholders that it is time to wind up the fund. A strategic review at stablemate abrdn Smaller Companies Income may come to a similar conclusion. Other funds heading down this path include Ediston Property Investment Company.

After all, investment companies generate income for those that run them. The manager gets a fee for its services from shareholders, in the form of costs such as the annual management charge. Board directors get paid for their time too. Why would they want to derail the gravy train?

The short answer is because this can be the right thing to do. Small investment companies sometimes struggle to attract investor interest; this lack of demand can then make it very difficult for existing investors to sell their holdings at an attractive price. Also, shares in the fund may slip to a gaping discount to the value of the underlying assets.

In which case, winding up the investment company by selling off its assets and returning the proceeds to shareholders represents a good way out of a tricky situation. If the fund has pursued other strategies to improve its fortunes without success, this may be the best option remaining for ensuring shareholders are able to realise their investments at close to net asset value.

That brings us back to the turkeys. The first point to make is that the manager of an investment trust ultimately has no say in the decision about whether to recommend a wind-up to shareholders. He or she, and the asset management firm for which they work, are simply contractors to the fund, paid to manage its assets.

As for the directors, they may not be keen to give up their fees, but they have a legally binding responsibility to put shareholders’ interests above all else, including their own earnings. If a wind-up is the best option for shareholders, the directors are duty bound to recommend it, even if that will mean saying goodbye to potentially lucrative payments.

The cases highlighted by Winterflood are interesting. You could brand these funds failures, in that they are struggling to achieve the critical mass necessary for a rewarding future. But the wind-up recommendations are also evidence that the investment company structure works – that there is real value in having an independent board of directors whose first duty is to investors.

Do investment company boards always behave in this way? Well, the truth is that these are subjective debates – the case for winding up a fund is rarely clear-cut and the grey area provides cover for boards reluctant to go down that route. There will no doubt be funds where at least some investors wish directors would follow the example set by their opposite numbers at abrdn Latin American Income.

Still, the broader point stands. Investment companies are the only collective investment vehicle with a legal framework that protects investors in this way. And that provides an important backstop when a fund is struggling.