IT boards are overlooked
Investors should scrutinise trusts’ boards as well as the behaviour of their investment portfolios
All advisers will know that the RDR is due to be implemented at the start of next year. They will also know that if they wish to preserve their independent status, they will need to consider a “fair and comprehensive range” of investment products for their clients – including investment trusts.
IFAs now have little time left to consider key differences between closed-end funds and their open ended counterparts. One of the most important of these is closed-end funds’ independent board of directors. In essence, boards have a duty to govern an investment trust to secure the best possible returns for shareholders within its established remit. It is they – not the trust’s investment manager – who ultimately control it.
Annabel Brodie-Smith, communications director at the AIC, explains: “The role of the board of directors is to represent shareholders’ interests and as such they are directly answerable to shareholders. Directors will oversee a fund management group and other third parties and are responsible for the strategic direction of a company. Shareholders can ask questions to directors and can meet them at AGMs or extraordinary general meetings (EGMs).”
According to a spokesperson for Henderson Global Investors, which manages a number of trusts, boards would tend to meet regularly through the course of the year and have a formal schedule of matters that are specifically entrusted to them.
“At each meeting, the board reviews the company’s investment performance and considers financial analysis and other reports of an operational nature. The board monitors compliance with the company’s objectives and is responsible for setting asset allocation parameters, investment and gearing limits within which the [fund] manager has discretion to act.”
The board is required to consider issues as diverse as strategy, management, structure, capital, financial reporting, internal controls, gearing, asset allocation, share price discounts, contracts, policy, finance, risk, investment restrictions, performance, corporate governance, board membership and appointments.
It will also supervise the management of the investment portfolio, which is contractually delegated to the fund manager, and it has responsibility for the approval of unquoted investments and all investments in in-house funds managed or advised by the investment company’s manager.
The total list of tasks for boards is long and complex – but one of the most basic things about investment trusts is that they are listed companies, and as such they have to operate under company law, with certain rules and codes they have to abide by.
Ed Morse, head of investment trust business development at F&C, says: “One of those is proper governance, and part of that governance is the fact that best practice is for companies to have a board of non-executive directors whose principal responsibility is the proper management and governance of that company with respect to looking after the interests of shareholders.”