Board benefits

While the travails of Neil Woodford continue, the star manager he left behind on departing Invesco Perpetual five years ago to go it alone is also coming under scrutiny. Several of the funds run by Mark Barnett, head of UK equities at Invesco Perpetual, have posted a period of underperformance – including Perpetual Income & Growth Investment Trust and Edinburgh Investment Trust.

That has prompted some investors to question the approach of Mr Barnett, who worked alongside Mr Woodford for many years and largely shares his investment philosophy. Indeed, some of Mr Barnett’s funds have invested in the same stocks as his former colleague.

Here’s the interesting thing though. While investors are quite right to put difficult questions to the managers with whom they entrust their money, particularly during more troubling times, they also have someone looking out for their interests if they invest via a closed-ended fund.

Both Perpetual Income & Growth Investment Trust and Edinburgh Investment Trust have independent boards of directors – like all investment companies – whose legal duty is to shareholders, rather than the fund manager. It is noticeable that both boards have already publicly addressed the question of Mr Barnett’s performance.

At Edinburgh Investment Trust, the latest annual report, published earlier this month, explains that the board has “stepped up its scrutiny of the way that the portfolio is managed”. At Perpetual Income & Growth, which has also just published it annual report, the board talks about its determination to “constructively challenge” Mr Barnett’s decisions.

This is not to say, of course, that either board is getting it right. There will naturally be observers who feel directors should be taking a tougher line with their manager. Others may believe that Mr Barnett’s long-term track record speaks for itself and that criticism of short-term performance is unwarranted given his determination to stick with an investment approach that has proved its value over time.

Either way, however, the important point here is that in an investment company structure at least, even star fund managers with long records of success must be prepared to be accountable. They answer to boards that have a fiduciary duty to look beyond celebrity in order to safeguard shareholders’ interests. Ultimately, they can even be fired.

The importance of such structures is frequently overlooked, particularly when all is well with the world. But the protection that an independent board affords investors can prove invaluable – and it is security that is not available to investors in open-ended funds.

It’s worth making one other point about Perpetual Income & Growth. While capital performance has been a struggle in recent times, the fund has just unveiled its 20th consecutive annual increase in the dividend it pays to shareholders, entitling it to membership of the Association of Investment Companies’ “Dividend Heroes” ranking. These are funds that have increased their dividends every year for 20 years – with the addition of Perpetual Income & Growth, there are now 21 of them.

Yield may not be enough to compensate investors in full for the performance lag they have suffered over the past three years or so. Nevertheless, during a period of ultra-low interest rates, the dependable income this fund has generated will have been widely appreciated.