The rise of the ‘beauty parade’

The idea of a ‘beauty parade’ is a wonderfully old-fashioned concept that you won’t generally find anywhere outside of the investment management industry these days. Institutions inviting proposals from prospective fund managers still hold beauty parades at which these pitches are heard; in most other industries, such events fall under the much less interesting banner of procurement.

Still, anachronistic as the term might be, beauty parades are very much in fashion within the investment company sector. Investment Adviser magazine recently reported on one such event currently being managed by BlackRock Income Strategies, pointing out that there has been a significant increase in the number of beauty parades across the industry in recent times.

The trend is an important one in two regards: not only does it highlight the significance of the closed-ended structure to investors, but also, it suggests that many investment companies are raising their game.

The clue to what really marks investment companies out from other types of collective investment fund lies in the name. Closed-ended funds are companies; they must therefore operate with independent boards of directors who have legally-binding fiduciary responsibilities to shareholders – the investors who have bought into them. Crucially, these boards must act in the interests of shareholders at all times, rather than prioritising another group – such as, say, a fund management company.

It is these independent boards that hold beauty parades as part of the process of appointing a fund manager to manage the company’s assets on behalf of shareholders. Such events are an opportunity to consider whether another manager might do a better job of managing the assets, delivering superior returns to investors.

Not all beauty parades result in a change of fund manager. The board may decide that the incumbent is the best manager for the job. Indeed, chopping and changing manager too often, or without good reason, is unlikely to deliver value for shareholders, given the long-term nature of investment.

Nevertheless, these events provide an opportunity for the board to hold the fund manager to account. Has it delivered the investment performance it promised? Are the charges it is levying fair? Could another manager deliver more at lower cost?

The trend of recent years has been for investment company boards to be much tougher – while it used to be comparatively rare for a closed-ended fund to change manager, this has become much more common. Fees have come down or been restructured. And the discounts at which the shares of many funds trade relative to the value of the underlying assets have narrowed.

All of which is positive for investors. There will be many shareholders in investment companies who haven’t given a second thought to the structure of their funds, but the fact they have an independent board looking out for their interests is nonetheless working in their favour. Fund managers know they will be scrutinised closely and that they may lose the contract if they do not deliver.

Advisers, too, should appreciate this structure. One of their most important jobs is to hold to account the providers of the investments they recommend to their clients; to have some help in that role is a real bonus.