Money appears to be no object when it comes to advertising and marketing funds and investment trusts. However, while it can feel reassuring to see the custodian of your life savings plastered across black cabs and station billboards, Allianz Technology Trust’s Robert Jeens (pictured) said it is important to remember who is paying for all of this: you.
As chairman of the trust, Jeens’ role is to stand up for the interests of shareholders. In practice he said this means playing a careful balancing act between keeping the investors and the fund managers happy – with the most obvious point of conflict being the issue of fees
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“In a perfect world, you would have fantastic performance and low costs, but life isn’t like that,” he explained.
“If you want to get the best managers, you have to get their attention and you have to pay appropriate fees. And that’s been an active topic of conversation on our board since I joined.”
When Jeens was appointed as a director in 2013, Allianz Technology was in the process of paying a performance fee to the managers of £6m, which he felt was excessive given the trust wasn’t much larger than £600m in size.
As a result, he said that one of his first actions was to renegotiate this deal to make it fairer for shareholders. This included reducing the weight of outperformance this fee was paid on from 15 per cent to 12.5 per cent and making sure it was only paid when underperformance had been captured first.
“We also cut the base fee from 100 basis points [bps] to 80,” he continued. “And importantly we ensured the base fee was paid on market value, not net assets. Because if you think about how to motivate a manager, you want the shares to trade at or above NAV [net asset value], so tell them their fees are going to go down if it is on a discount.
“I think it is a very powerful message to send.”
More recently, the board negotiated a tiered management fee so that if the trust dips below £400m in size, the annual management charge falls from 80 to 60bps.
However, reducing management fees is not the only way boards can help to deliver value for money to investors. Jeens said the directors at Allianz Technology have reduced the cost of buying back shares, adding that although this is an invisible cost, whether you pay 10bps or 20bps “it’s coming straight out of shareholder pockets”.
He also said that shareholders themselves have a role to play in keeping fees on investment trusts to a minimum, by putting pressure on the directors.
“I have been on the boards of a number of trusts now and it seems to be all the same people that turn up to AGMs,” he explained.
“There aren’t actually all that many of them. Depending on the size of the trust there are somewhere between 20 to 40 people who reliably turn up. They only seem to hold a few shares in each trust and spend a good degree of the AGM time comparing the quality of sandwiches or wine rather than necessarily the investment merits.
“But in the past few months we had a meeting to view and approve the prospectus and I assumed no shareholders would turn up. So, I was then delighted that two or three people did.
“And to their credit, one of them said, ‘how much is this costing us?’ and I thought that was a great question because that is exactly what shareholders should come along and ask.”
Jeens said that although the cost of producing the prospectus was originally quoted at just under £250,000, in the end the board negotiated it down to just under £150,000.
“So, there are costs that are otherwise hidden for shareholders, [and] boards have to take responsibility and have to be a little bit tough on things like that,” he added.
Keeping charges to a minimum is not the only role that boards play on investment trusts, however.
Gay Collins, a director on JPMorgan Global Growth & Income, said in 2016 the JPMorgan Overseas trust (as it was then called) “was going nowhere”. As a result, the board took the decision to move to a total return focus by increasing the distribution to shareholders, while retaining the same fund manager and style.
“This was a watershed moment for the trust,” she said. “This decision resulted in the trust moving from a 15.5 per cent 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.”
The trust has made 65.61 per cent since its strategy change in July 2016 compared with 35.56 per cent from the MSCI AC World index and 33.97 per cent from its IT Global Equity Income sector.
Performance of trust vs sector and index since strategy change
Source: FE Analytics
However, the importance of investment trust boards is probably best summed up by looking at the changes seen at Alliance Trust over the past decade.
Clare Dobie (pictured), a director on the trust, recalled how non-executive directors have in the past been referred to as “baubles on a Christmas tree” by Lonrho chief executive Tiny Rowland and “fuddy duddies” by Hargreaves Lansdown founder Peter Hargreaves
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“That is not quite up-to-date,” she 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.”
Annabel Brodie-Smith, communications director at the Association of Investment Companies, added: “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.”
She added: “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.”