David Prosser looks at how the governance model of the investment company sector is its most striking differentiating feature.
Investment companies are different to open-ended funds in all sorts of ways, but one of the most striking examples is their governance model. Investment companies are stock market-listed vehicles with independent boards of directors who have exactly the same fiduciary responsibilities as the directors of other types of listed companies.
Above all, they must safeguard the interests of shareholders – and in the investment company universe, that means holding the manager of the fund to account for its investment performance. The good news for investors, moreover, is that boards have become increasingly diligent in the way they perform that duty – we have seen countless examples this year of investment company boards attempting to protect investors with interventions. These range from introducing discount control mechanisms to hiring and firing managers.
So how much should the directors of an investment company be paid? Well, research just published by Trust Associates suggests the average non-executive director received fees totalling just over £24,000 in 2014 (rising to an average of almost £35,000 for a chairman). That’s an increase of 4.8 per cent on the fees that directors earned in 2013.
This increase represents the continuation of a trend that has been going on for a decade now. In 2004, non-executive directors were earning just over £12,000 a year. Their pay has consistently risen faster than the rate of inflation or national average earnings.
Trust Associates’ analysis may surprise some advisers. After all, the trend in the investment company sector on fees has generally been downwards in recent times – particularly since the retail distribution review, which offered open-ended funds the chance to compete more aggressively on charges with their investment company peers, which have long been cheaper.
That doesn’t necessarily mean investment company directors aren’t worth what they’re paid. Trust Associates argues: “It is important that non-executive directors are paid properly, particularly to attract and retain the best directors.”
Quite right too. The governance structure of an investment company is a unique selling point. But it only has any value if the directors of the fund are prepared to step up to the plate – they haven’t always done so in the past. What we need is well-qualified, experienced directors with the competence and willingness to challenge the fund’s management on behalf of investors.
Equally, however, higher directors’ fees will eventually translate into higher costs for investors, which will undermine performance. “Further increases will need to be both within [the fund’s] stated policy and clearly justified,” says Trust Associates. “Indeed, increases above inflation may be hard to justify in the current environment of very low inflation, unless such increases are more than matched by growth in the capital value or the dividend.”
This may even be an issue that advisers and investors want to think about when comparing investment companies. After all, if a fund’s directors are over-charging for their services, have they really got investors’ best interests at heart?
Equally, however, it’s important to compare like with like. Two funds in the same sector may require directors with different skills and experiences – because one is much bigger than the other, for example, or because it is in a position where the directors need to be especially engaged. “Deciding on an appropriate peer group to compare your fees against is not always that simple and may well be different from that which you use to compare your company’s performance against,” Trust Associates concludes.