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Importance of the investment company structure

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29 November 2016

In light of the FCA’s recent asset management market study report, David Prosser examines why the closed-ended structure looks more important than ever.

The forthcoming launch of The People’s Trust continues to make headlines, with founder Daniel Godfrey raising £100,000 for the pre-launch process through crowdfunding. Mr Godfrey, a former chief executive of both the Association of Investment Companies and the Investment Association, has struck a chord with many – his crowdfunding campaign hit its targets within weeks.

Leaving aside the merits, or otherwise, of investing in The People’s Trust when it does come to market, it’s worth reflecting on why people are attracted to the idea – and why Mr Godfrey has opted for a closed-ended structure rather than to launch an open-ended fund. Could it be that investors and advisers alike are looking for a different type of relationship with those they trust to manage their money?

The backdrop against which The People’s Trust is launching is significant. In particular, the Financial Conduct Authority’s recently-published market study of the asset management sector could hardly have been more damning. It essentially accused asset managers of over-charging for under-performing investments.

The FCA’s verdict confirms many people’s worst fears about many of the investment funds they own; they worry about the returns these funds are generating, struggle to get to grips with the charges they’re paying, and feel disenfranchised by professional asset managers with little accountability to investors.

In this context, you can see the appeal of The People’s Trust, with its promises of caps on salaries and bonuses, and its commitment to shareholder responsibility via an independent board and a shareholder committee with a specific remit to scrutinise operations, including costs and pay. There is no guarantee the fund will deliver superior performance but it will at least operate with governance structures that are weighted in favour of investors.

It is worth saying, however, that this is a crucial feature of all closed-ended funds. Investment companies are corporate structures and like every other stock market-listed business, they must operate with an independent board of directors who each have a fiduciary duty to act in the best interests of shareholders. They must also comply with reporting requirements set out in company law, as well as complying with the regulatory regime policed by watchdogs such as the FCA.

Consider that in conjunction with the FCA’s first proposed remedy – “a strengthened duty on asset managers to act in the best interests of investors, including reforms that will hold asset managers accountable for how they deliver value for money, and introduce independence on fund oversight committees”. Aren’t investment companies already delivering exactly that?

Equally, much of the FCA’s disquiet about charges relates to fees and costs incurred by funds on investors’ behalf, but not included in the headline charges publicised by the fund. While this criticism is levelled against all asset managers, investment companies have little chance of hiding such fees from investors, since they must be declared in annual reports.

This is not to suggest the investment company sector is somehow whiter than white. It will want to reflect on many of the findings in the FCA report – and many of the regulator’s proposed remedies will provide important food for thought.

Nevertheless, the structure of investment companies, though not always widely appreciated, looks more important than ever in the light of the FCA’s work. The People’s Trust has very sensibly chosen to follow this model for pooled fund investment – and added additional bells and whistles of its own, which may appeal to many – and investors seem to like it. That’s what smart people do, of course – if you’re going to launch a new product, aim to tap into the prevailing mood of your potential customers. But investors attracted to this new launch may want to think more broadly about the whole investment company sector, which offers a great deal of comfort to those dismayed by the FCA’s warnings.

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