The role and impact of investment company boards

Independent boards of directors are one of investment companies’ most important benefits. They offer additional oversight for investors and have a legal responsibility to protect investors’ interests. In the 150^th year of investment companies and, for the first time at an Association of Investment Companies (AIC) roundtable, on 2^nd October we heard from the directors themselves.

Clare Dobie, Director of Alliance Trust, Robert Jeens, Chairman of Allianz Technology and Gay Collins, Director of JPMorgan Global Growth & Income discussed the role of investment company directors and gave examples of how their boards have acted to deliver value for shareholders in recent years. Their views have been collated alongside those of Richard Gubbins, Chairman of Henderson Alternative Strategies Trust, and James Barnes, Chairman of Dunedin Smaller Companies.

Annabel Brodie-Smith, Communications Director, Association of Investment Companies said: “Independent boards are a unique advantage of investment companies and provide an additional layer of oversight for investors. Boards stand up for the interests of shareholders and in recent years have been particularly active in negotiating lower fees for investors, with over a third of investment companies reducing fees since 2013. Investment companies with their independent boards are leading the way on governance and that is a clear benefit that sets us apart from the open-ended industry.”

What is the role of an investment company board?

Robert Jeens, Chairman of Allianz Technology said: “The essential role of investment company boards is to act on behalf of all the company’s shareholders to ensure that the reasonable expectations of those shareholders are met and if possible exceeded.  The board must be independent of the investment manager as a key role of the board is to ensure that the investment manager is up to the job - and to take action should that not be the case.  The board should adhere to the highest governance standards and insist on clear and effective communications with all stakeholders. 

“We’re there to keep the manager on track and ensure running costs represent good value. The role of a board is a multi-faceted one so an effective board will typically comprise individuals with specific skillsets and strengths that complement those of their fellow board directors.  Collectively we work closely with the investment manager, striving to deliver strong performance and the highest levels of stewardship.”

Richard Gubbins, Chairman of Henderson Alternative Strategies Trust said: “Successful investment trust management is a partnership between the boards and the appointed investment managers, who act as the executive managers of the company. The board’s key responsibility is the overall governance of the company ensuring that those to whom responsibilities have been delegated, undertake those responsibilities in a way that contributes to the long-term success of the company so that it achieves its wider objectives for the benefit of the company’s shareholders.

“Shareholders benefit from the wide range of experience, expertise and challenge that directors bring to their role across a wide range of areas including investment market outlook, risk and control, sales and marketing and financial reporting. The board is also receptive and responsive to the views of shareholders and other stakeholders, making sure the investment trust stays a relevant and attractive investment opportunity.”

How have boards acted to deliver shareholder value?

Clare Dobie, Director of Alliance Trust said: “The board of Alliance Trust has completely transformed the £3bn trust. It has introduced a new investment approach, changed the manager, streamlined the corporate structure, seen off an activist investor and more. It has set a demanding performance target for the equity portfolio, which it is in line to meet. In summary it has undertaken a radical overhaul of a 130-year-old investment trust for the benefit of shareholders. The board has led this work and continues to oversee progress.”

Gay Collins, Director of JPMorgan Global Growth & Income said: “As a board, we have sought to make the trust appeal to more investors, especially post RDR.  Part of that relates to size and liquidity, and when we were a sub £200 million market cap trust we were going nowhere. The decision to move to be a total return focused trust through increasing the distribution policy whilst retaining the same fund manager and style was a watershed moment for the trust.  This was driven by the board, and in particular our Chairman, Nigel Wightman.  Of course, we worked closely with JP Morgan and our brokers Winterflood.

“This decision resulted in the trust moving from a 15.5% discount to a premium, and then issuing shares. Our shareholder register changed significantly, with several marginal institutional shareholders being replaced by private client brokers as well as private individuals.”         

Robert Jeens, Chairman of Allianz Technology (ATT) said: “All boards should monitor closely the discount/premium to NAV at which their company’s shares trade and take action to buy in shares or issue new shares where it is in the interests of shareholders to do this.  This is an area where the interests of shareholders and those of the investment manager are not naturally fully aligned.  For a specialist trust like ATT the imbalances between shareholders wishing to buy and sell shares, which drive the discount/premium, may be more exaggerated.

“In the past five years ATT has bought in some shares as the discount moved out towards double figures but more recently there has been sustained and substantial demand for ATT shares leading to the shares trading at a premium.  The board has responded to this firstly by reissuing shares held in treasury and then by issuing new shares.  In the current financial year the board identified that new share issuance would exhaust the 10% limit on new shares approved by the shareholders at the last AGM and acted quickly to hold an additional shareholder meeting to approve both a further 10% limit and to approve the issuance of a prospectus to enable further substantial issuance.  Shareholders supported these moves and the issuance of new shares has continued and the prospectus has now been published. 

“Setting fees is another key role for the board, aiming to strike a fair balance between minimising the cost to shareholders and making sure that the investment manager is appropriately incentivised to deliver excellent investment performance. The board of ATT has paid close attention to ensuring a fair fee structure and most recently agreed a tiered management fee which allows both individual shareholders and the investment manager to benefit from the significant growth of ATT during 2018.”

Richard Gubbins, Chairman of Henderson Alternative Strategies Trust said: “Shareholders also benefit from the board’s ongoing dialogue with the manager on fee rates ensuring that shareholders pay a fair price for investment management services. Like many other investment trusts, Henderson Alternative Strategies Trust recently agreed a tiering arrangement with the investment manager so shareholders enjoy a lower management fee rate for assets above a certain threshold. This discount for size is something that has been driven by boards and accepted by investment managers. It is the aim and ambition of our board to achieve performance through increasing the net asset value of our company and reducing the size of our discount, and we saw a tiered structure as appropriate to the level of net asset value that we would aspire to achieve in future years.”

James Barnes, Chairman of Dunedin Smaller Companies (DSC) said: “The DSC merger has come about primarily as a result of a number of factors all coming together at the same time. The board identified an opportunity following the merger of our manager’s parent entity Aberdeen Asset Management with Standard Life bringing one of the leading performers in our sector under the same management roof as ourselves and broadening the investment expertise available to us. At the same time we were aware of the effects that the company’s size and limited secondary market liquidity had on shareholders notwithstanding the company’s recent good performance.

“We therefore asked our manager to look at the various options that might be available to us under the new Aberdeen Standard Investments umbrella. Our conclusion was that, of the various options available, if we could get the costs right, a merger with Standard Life UK Smaller Companies Trust offered the most benefits to our shareholders in terms of discount and future potential for dividend growth.

“Although once underway the merger process is somewhat formulaic, the board has an important role in staying on top of that process in terms of costs. In addition, the board had a particular regard to our private individual shareholder base both in terms of a deal structure that protected capital gains and of how ‘user friendly’ the documentation was.

“What we felt was a real success in this instance was all parties working together to achieve a significantly lower than anticipated realignment cost of circa 0.8% - a particularly good result given the relatively illiquid nature of the portfolio and a total transaction cost of £1.8m, including stamp duty representing 1.13% of assets.”

How is the role of boards developing?

Gay Collins, Director of JPMorgan Global Growth & Income said: “Gender diversity has been a significant development. When I first came onto the board in January 2012, my first AIC seminar suggested that women were a rare commodity.  This has changed significantly over the last six years, and so has the experience of the board.  Many more of us come from a marketing or PR background and I feel that adds an extra dimension in terms of pushing for sales and marketing initiatives.  Funds are sold not bought, and investment trusts need to up their game.”

Robert Jeens, Chairman of Allianz Technology said: “Simply put, boards are responsible for efficient and effective leadership of the company and the company’s affairs. But the requirements and knowledge needed to deliver this are forever changing. As well as monitoring investment strategy and performance, we are also needing to comply with evolving and increasing statutory and regulatory requirements, as well as understanding the changing profile and investment preferences of our individual shareholders.  Change makes the role forever interesting but also challenging. However, as a board director of an investment company you really can make a tangible difference and to be associated with one that is growing in size and profile by delivering outperformance to its investors is incredibly satisfying.”

-Ends-

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Notes

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 354 members and the industry has total assets of approximately £188 billion.
2. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance.  The value of investment company shares, and the income from them, can fall as well as rise.  You may not get back the full amount invested and, in some cases, nothing at all.
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