Trust boards under fire

The presence of an independent board of directors has long been touted as providing a welcome safety net for investors in closed ended funds.

While the managers strive to generate positive returns, trust boards look after the interests of shareholders. According to Guy Rainbird, public affairs director at the Association of Investment Companies (AIC), these interests include controlling the total expense ratio (TER), making sure the manager is complying with the trust’s investment objectives and, in extreme cases, replacing the manager.

“The presence of a board is a definite plus for investors."

“Controlling charges is a good example of this. Closed-ended funds tend to have lower TERs than their open-ended counterparts.”

In the vast majority of cases, the relationship between a board and manager is cordial. However, in recent times two high profile cases have hit the headlines where this relationship has broken down. In both cases, it is the board’s right to hire and fire a manager on behalf of shareholders that has been the root cause of the problem.

The first took place on the $62m Ukraine Opportunity Trust, which saw Fabien Pictet and Partners oust the board that was trying to replace them as managers.
Following a legal challenge, the board, which included former AIC chairman Alexander Townsend, stepped down and was replaced by a new one aligned to FPP.

The second case involves investment heavyweights Scottish Widows which has put forward proposals to buy up the assets of the £431m UK Balanced Property fund. Scottish Widows was recently replaced as managers of the trust by boutique Cordatus Partners, a firm made up of former Swip managers.

Bestinvest's Justin Modray agrees that a board provides a safeguard for investors’ interests.

“Looking after these interests includes sacking a manager,” he says.

“Provided you have the confidence in the quality of board to safeguard those interests this has to be a good thing. There seems to be a greater pressure on boards to flex their muscles nowadays.”

He points to the actions of F&C and Witan which have both adopted a multi-manager approach in recent years.

“These two trusts are being much more proactive, keeping some assets in-house and moving the rest out of house.”

However Modray warns that when the managers fight back, as in the case of the Ukraine Trust and UK Balanced Property, it may cause a storm in a teacup.

“In these cases, it is up to shareholders to decide which way to take which can often be confusing and complicated.”

Despite the recent furore surrounding the two trusts, Modray maintains that boards’ making full use of its powers can only be viewed positively.

“We should be under no illusion about this but investment trusts are still in decline against the open-ended side of the business. Anything that this sector can do to create a unique selling point is a positive step.”

1 June