Following the Woodford Equity Income fund debacle, investors may be wondering where that leaves Neil Woodford’s investment trust – Patient Capital Trust – and whether the board will continue to back him.
As in any public company, the board of an investment trust is charged with managing the business of the company (for that is what it is) in the interests of shareholders. After all, the shareholders own the company.
The business of an investment trust is to manage a pot of money in much the same way as the business of Tesco is to run supermarkets.
They are both public, quoted companies with the same structure.
The difference is that the investment trust has a board and no employees.
The task of managing its assets is outsourced, for a fee, to a business that specialises in asset management.
The ‘interests of shareholders’ sounds simple, until you delve down into the what it actually means.
Is that the interest of shareholders in respect of their returns this year, next year or over the next five to 10 years? Such is the challenge facing any board.
The board will probably sensibly conclude the answer is future interests of shareholders – that is, the ongoing success of the company.
Changing a manager will only be considered if performance has been poor for some time.
If changing means taking a hit this year to improve the outlook the board may very well do that.
The challenge is gauging whether action today will produce a better outcome tomorrow. When an investment trust board is mulling changing the manager of its assets there will always be a cost to doing so.
This is what will be on their next board meeting agenda to decide on: is the inadequate performance of the current manager fixable?
We all know of times when we have lost faith in a manager, just in time for them to recover their mojo.
Improving performance with the same manager is much less costly and disruptive than moving the portfolio to another manager – they may even be amenable to reducing the management fee until it does improve. But here we have the problem with any outsourced service.
The bald truth is that if the assets of the fund are not being well-managed the board’s ability to tweak things is limited.
Usually it is a simple case of threatening to move the mandate to another manager – if that does not work, move it.
If the manager is a large asset management house there is some flexibility. It could decide to appoint, at the request of the board, a different team to run the assets. A small one does not have that same flexibility.
But investing history is littered with the carcasses of investment trust boards who avoided grasping the nettle for too long.
Eventually confidence evaporates, the discount to net assets builds and the fund is wound up.