The 'beauty parade' being held to run the BlackRock Income Strategies trust has been heralded as the latest sign of newfound proactivity among investment company boards.
Changes to the management teams of investment trusts have become a more common occurrence in recent years, as boards of closed-ended funds seek to ensure that the most suitable investment team is looking after their portfolio.
BlackRock Income Strategies – which has launched its reassessment just a year-and-a-half after switching the mandate from F&C to BlackRock – joins Alliance Trust in undertaking a strategic review. Many trusts have also renegotiated management charges in recent months, and analysts have suggested further moves could follow.
While the move towards company boards asserting their independence has been a gradual process, it has accelerated in recent years, according to Charles Cade, head of investment companies research at Numis Securities.
“The shift to independence of boards has taken place over the past decade, but now there is far greater ‘real’ independence, with boards far more willing to review the management contract. Over the past couple of years, numerous funds have cut management fees and removed performance fees.
“In addition, there have been more beauty parades, not all of which have led to a change of manager.”
Mr Cade also highlighted an increase in pressure from shareholders, both institutional and private wealth managers, when funds are underperforming and trading at a wide discount.
“In the past, the private wealth managers would rarely vote, but they now take a more active role.”
An increase in manager turnover rates could have a downside for the sector. Investment companies are often marketed as a long-term product, but frequent changes to management could increase uncertainty over the trust’s ability to meet its objectives, as management changes often indicate problems with fund performance.
“Regular assessment of the manager by the board is important and, indeed, a formal requirement, although we would only expect a full strategic review if a problem has been identified,” said Kieran Drake, an analyst on the investment companies research team at Winterflood.
Trusts’ long-term reputation may not be entirely justified, according to figures from Numis earlier this year which showed that just a quarter of trusts launched between 2000 and 2009 are still in existence.
Even the most proactive boards still only tend to push for a change of strategy once performance has disappointed a majority of shareholders over a reasonable amount of time, according to Monica Tepes, director of investment companies research at Cantor Fitzgerald.
Fears over changes to the long-term strategy of an investment company can also be eased by the fact that most boards will offer existing shareholders an option to exit the fund at a stated price at the time of any major change.
Ms Tepes said: “As long as you have the option not to take up the new manager or strategy, I think these are all good developments and are what investment companies are meant to be – vehicles that serve their shareholders’ best interests – and if change is believed to be in their best interests then change should be implemented.”
Key numbers
9.4%: Current discount on BlackRock Income Strategies
26%: Number of trusts launched between 2000 and 2009 that still exist
Board considers management options
The board of the £326m BlackRock Income Strategies trust is undertaking a strategic review and considering new management options just 20 months after BlackRock took over the trust, formerly known as British Assets, from F&C.
The investment strategy also shifted away from a UK equity mandate to a multi-asset income strategy at the time of that management change. But a downturn in performance since then saw the company announce in August that it would review the trust’s investment objective, citing a lack of viable income investment opportunities and the UK’s decision to leave the EU.
The fund is currently trading at a 9.4 per cent discount and its share price has dropped by 14.7 per cent year to date in 2016 on a total return basis. While it delivered a 6 per cent yield over the past 12 months, the NAV has declined by 15.4 per cent since the change in mandate.
