What is the notice period for the current manager? This will often be a year.
So the fund will still be managed by an outgoing team for 12 months – not ideal – or the board will pay out the notice period and seek to move the money across to a new manager as soon as possible.
That will mean double management fees for a year, to be borne by the fund.
Likewise the current manager may administer any savings plan for the trust, which will also be on a notice period.
What is the shape of the fund? If there are big holdings the market will realise a manager change is in the pipeline and may bid down the stocks, assuming that the new manager will quickly want to sell holdings and construct a portfolio in line with the strategy they have mapped out to the board.
Might it be better to encourage the current manager to steadily adjust the holdings to a less risky configuration and then change the manager?
This may be desirable, but it requires a very co-operative manager and for the board to have nerves of steel since they are effectively micromanaging the expert they have appointed to run the assets.
What is the shortlist of prospective managers for the assets?
If the investment trust is in a specialist area the shortlist may be tiny.
And would they be able, or want to, take on the assets?
After all they may have their own agenda – offering direct to investors to merge the investment trust with their own listed vehicle perhaps.
For a big, generalist asset class – like UK equities – the list will be longer so there will be competition to run the assets.
But the best managers will know the value of their reputation and will negotiate fees and notice periods accordingly.
What do the big shareholders in the investment trust want?
The board should have at least a feel as to what the bigger holders of the trust are thinking.
If there is an activist shareholder on the register, the board will be aware that their time horizon may not be the same as the other shareholders.
We have found there are usually complications unique to each trust that need to be cleared before any decision is made.
When drawing up a shortlist of prospective new managers, the board must check carefully for conflicts of interest between their own directors who are also directors of one of the managers on the shortlist.
- Investment trust boards have to think of the interests of shareholders
- There are many failed investment trusts where the board has not dealt with issues in a timely manner
- Changing a manager can depend on the shape of the fund
This will also apply to any of the directors who are former directors of any of the managers.
Where a clear conflict exists, the conflicted party should not be permitted to vote on the change and the conflicted parties should recuse themselves from discussion and voting on the issue.