Although I am somewhat reluctant to admit it, I have been writing about investment trusts for the best part of 30 years – through the good and bad times.
There have been plenty of bad times along the way: the 1987 stock market crash; the bursting of the 2000 dotcom bubble; and the awful split capital investment trust scandal that ensued.
A debacle that prompted the regulator at the time – the inept Financial Services Authority – to describe it as the worst episode of misconduct it had ever seen.
Yet the investment trust industry has come through it all intact.
A few names associated with the industry have disappeared along the way – the likes of Ivory & Sime, Edinburgh Fund Managers and the once mighty Globe Investment Trust.
As have a few characters – none bigger or more industry changing than the dynamic Philip Chappell, former mercurial adviser to the Association of Investment Trust Companies, who died 15 years ago at the tender age of 63. It was Mr Chappell who forced the AITC to become more consumer facing.
For the first time since I have been reporting on the sector, boardrooms are now flexing their muscles. They are no longer allowing the managers to dictate terms.But today, the sector is probably in the rudest of good health that it has been for many a year.
Of course, strong stock markets have helped but its renaissance is more to do with consumer focus (the Chappell legacy) than anything else.
It has realised to survive and compete in a crowded investment funds market, it must put consumers first. It is a message preached on high by the Association of Investment Companies (AITC as was) and one that has filtered down to individual boards.
Charge trends are emerging
For the first time since I have been reporting on the sector, boardrooms are now flexing their muscles. They are no longer allowing the managers to dictate terms.
They are doing what they are employed to do – which is to stand up for the rights of shareholders. They are earning their fees. Boardroom bicep flexing is manifesting itself in two ways.
First, more boards are now sacking poor performing investment managers – and then putting the management contract out to tender.
It is often a tool of last resort but the fact that boards are now employing it should be welcomed. Woeful investment management should not be tolerated.
Secondly, and probably more importantly as far as investors are concerned, boards are now demanding a better deal on charges from their managers. Reductions are the order of the day.
I recently asked the AIC for details of the trusts where charges had been reduced.
The list that followed nearly blocked my email account. It went on and on – longer than a Kim Kardashian shopping list. Aberdeen Japan, Artemis Alpha, Value & Income, Fidelity European Values, Monks, Allianz Technology, Henderson High Income et al.
Two trends on charges seem to be emerging. First, many boards are abolishing performance fees. Good.
Second, they are keen to introduce ‘blended’ fees, acknowledging the fact that there are economies of scale when it comes to the investment management of a trust. So, the norm is increasingly a set fee on a trust’s assets up to a certain size – and then a lower fee on any assets above that level. As a trust grows in size, shareholders get a bigger slice of the cake. That is the way it should be.
With new-style key information documents now providing explicit details on investment trust charges – including portfolio transaction costs, ancillary fees, as well as the management charge – downward pressure on fees should remain strong.
Good news for investors, new and old.
Taking a vote
Of course, not everyone is prepared to play ball as recent events at Invesco Perpetual Enhanced Income have highlighted.
When this trust’s board recently flexed its muscles on charges – not surprising given Invesco took charges in the year to the end of September 2017 of 1.86 per cent – Invesco initially accepted its lot. A new blended fee working out at 0.77 per cent per annum was agreed. A performance fee was disbanded.
But Henley-on-Thames-based Invesco then changed its mind.
It offered its resignation, forcing the board to go shopping for new investment managers. But Invesco was not quite finished. As a significant shareholder in the trust, it has now decided to requisition a vote calling for both the trust’s chairman and a key director to be replaced.
The objective, it seems, is an attempt after all to cling on to the management contract. Get rid of the awkward squad (chairman Donald Adamson and director Richard Williams) and Invesco believes it will be able to get its way.
As things stand, Invesco has a big chance of winning the vote. Not because its actions are right (they are not), but because many of enhanced income’s shareholders will find it nigh impossible to vote because their investments are held through investment platforms.
Most investors holding shares in this way will not even be made aware that such a key vote is taking place. Those determined to vote will have to jump through many hoops to do so.
Invesco’s behaviour on enhanced income does little to enhance its reputation as the friend of the small investor.
It is also throwing a spanner in the way of all the good work the AIC has done to continue to make investment trusts both relevant in today’s ferociously competitive retail fund management sector and investor friendly.
Let us hope Invesco sees sense and backs down before it harms the investment trust cause.
Jeff Prestridge is personal finance editor of the Mail on Sunday
