By Annabel Brodie-Smith
Hope you are enjoying the autumn sunshine. I have gone for a boat trip on The Thames and made a blackberry and apple crumble with hand-picked blackberries, so I’m making the most of my first autumn in the country.
This month, we are looking at the positive impact independent boards of directors have on their investment companies. Independent boards stand up for the interests of shareholders and are a clear benefit that sets investment companies apart from the open-ended industry. Please watch my interview to get an insight into directors and what independent boards do. I talk to Clare Dobie, director of Alliance Trust, Robert Jeens, Chairman of Allianz Technology, and Gay Collins, Director of JPMorgan Global Growth & Income. Please also see our article on the role of boards with examples of what they have done to help, and in some cases transform their companies.
Our esteemed financial journalist, Ian Cowie, this month delves into boards and questions a number of experts to find out more about what boards do. This includes the view of James de Sausmarez, head of investment trusts at the asset manager Janus Henderson, who explains: “The board challenges and questions, they ask why a fund manager is doing what he or she is doing - and I think managers enjoy the interaction. If you are an individual investor, it’s enormously comforting to know there is a group of diversely skilled people overseeing the manager.”
Talking of boards, the AIC’s Ian Sayers describes how investment company independent directors are “up in arms” about the “reckless” Key Information Documents (KIDs). Every investment company has to produce a KID, which private investors must view before purchasing investment company shares on platforms.
Click below to watch the video.
The AIC and the industry’s views are summed up in the title of the research we produced demonstrating the problems of KIDs, ‘Burn before reading’. Ian explains that if investors are misled by the KID document: “It will be a regulatory scandal, one we have being warning about since 2010 when KIDs were first being developed (yes, you did read 2010 right).” The AIC and the industry are calling robustly for KIDs to be suspended so the rules can be changed before more harm is done.
On a totally different subject, the Brazilian election is on Sunday 7th October so we are taking a look at investment company managers’ views on the prospects for Brazil.
It’s been a rocky ride for Brazil investors, but with news that its recession has ended and the prospect of political change, investment company managers give their views as to whether the country will be celebrating in carnival fashion, or drowning their sorrows with cachaça.
Thanks so much for all your entries to our competition to win £3,000 to invest in an investment company. If you haven’t yet entered please do enter, as all you need to do is fill in our short survey on saving for children.
Finally on 30th November the 9th VCT & EIS Investor Forum (London) is taking place. This is organised by Angel News and is an opportunity to meet investment managers and the companies they back all in one place.
There is a 15% discount on the ticket price for Compass readers: just enter the discount code AICREADER.
Wishing you a good month and let’s hope there are no Halloween ghouls in this year’s October Budget.
Communications Director, AIC
Investment company boards
Board directors offer rare insights into how they have steered their companies through challenging times
Independent boards of directors are one of investment companies’ most important benefits. They offer additional oversight for investors and have a legal responsibility to protect investors’ interests. In the 150th year of investment companies and, for the first time at an AIC roundtable, on 2nd October we heard from the directors themselves.
Clare Dobie, Director of Alliance Trust, Robert Jeens, Chairman of Allianz Technology and Gay Collins, Director of JPMorgan Global Growth & Income discussed the role of investment company directors and gave examples of how their boards have acted to deliver value for shareholders in recent years. Their views have been collated alongside those of Richard Gubbins, Chairman of Henderson Alternative Strategies Trust, and James Barnes, Chairman of Dunedin Smaller Companies.
Watch board directors Clare Dobie, Alliance Trust, Robert Jeens, Allianz Technology and Gay Collins, JPMorgan Global Growth & Income discuss how investment company boards add value for investors. Click below to play the video.
Annabel Brodie-Smith, Communications Director, Association of Investment Companies said: “Independent boards are a unique advantage of investment companies and provide an additional layer of oversight for
investors. Boards stand up for the interests of shareholders and in recent years have been particularly active in negotiating lower fees for investors, with over a third of investment companies reducing fees since 2013.
“Investment companies with their independent boards are leading the way on governance and that is a clear benefit that sets us apart from the open-ended industry.”
What is the role of an investment company board?
Robert Jeens, Chairman of Allianz Technology said: “The essential role of investment company boards is to act on behalf of all the company’s shareholders to ensure that the reasonable expectations of those shareholders are met and if possible exceeded. The board must be independent of the investment manager as a key role of the board is to ensure that the investment manager is up to the job - and to take action should that not be the case. The board should adhere to the highest governance standards and insist on clear and effective communications with all stakeholders.
“We’re there to keep the manager on track and ensure running costs represent good value. The role of a board is a multi-faceted one so an effective board will typically comprise individuals with specific skillsets and strengths that complement those of their fellow board directors. Collectively we work closely with the investment manager, striving to deliver strong performance and the highest levels of stewardship.”
Richard Gubbins, Chairman of Henderson Alternative Strategies Trust said: “Successful investment trust management is a partnership between the boards and the appointed investment managers, who act as the executive managers of the company. The board’s key responsibility is the overall governance of the company ensuring that those to whom responsibilities have been delegated, undertake those responsibilities in a way that contributes to the long-term success of the company so that it achieves its wider objectives for the benefit of the company’s shareholders.
“Shareholders benefit from the wide range of experience, expertise and challenge that directors bring to their role across a wide range of areas including investment market outlook, risk and control, sales and marketing and financial reporting. The board is also receptive and responsive to the views of shareholders and other stakeholders, making sure the investment trust stays a relevant and attractive investment opportunity.”
"Successful investment trust management is a partnership between the boards and the appointed investment managers"
Richard Gubbins, Henderson Alternative Strategies Trust
How have boards acted to deliver shareholder value?
Clare Dobie, Director of Alliance Trust said: “The board of Alliance Trust has completely transformed the £3bn trust. It has introduced a new investment approach, changed the manager, streamlined the corporate structure, seen off an activist investor and more. It has set a demanding performance target for the equity portfolio, which it is in line to meet. In summary it has undertaken a radical overhaul of a 130-year-old investment trust for the benefit of shareholders. The board has led this work and continues to oversee progress.”
Gay Collins, Director of JPMorgan Global Growth & Income said: “As a board, we have sought to make the trust appeal to more investors, especially post RDR. Part of that relates to size and liquidity, and when we were a sub £200 million market cap trust we were going nowhere. The decision to move to be a total return focused trust through increasing the distribution policy whilst retaining the same fund manager and style was a watershed moment for the trust. This was driven by the board, and in particular our Chairman, Nigel Wightman. Of course, we worked closely with JP Morgan and our brokers Winterflood.
“This decision resulted in the trust moving from a 15.5% discount to a premium, and then issuing shares. Our shareholder register changed significantly, with several marginal institutional shareholders being replaced by private client brokers as well as private individuals.”
Robert Jeens, Chairman of Allianz Technology (ATT) said: “All boards should monitor closely the discount/premium to NAV at which their company’s shares trade and take action to buy in shares or issue new shares where it is in the interests of shareholders to do this. This is an area where the interests of shareholders and those of the investment manager are not naturally fully aligned. For a specialist trust like ATT the imbalances between shareholders wishing to buy and sell shares, which drive the discount/premium, may be more exaggerated.
"This decision resulted in the trust moving from a 15.5% discount to a premium"
Gay Collins, JPMorgan Global Growth & Income
“In the past five years ATT has bought in some shares as the discount moved out towards double figures but more recently there has been sustained and substantial demand for ATT shares leading to the shares trading at a premium. The board has responded to this firstly by reissuing shares held in treasury and then by issuing new shares.
“In the current financial year the board identified that new share issuance would exhaust the 10% limit on new shares approved by the shareholders at the last AGM and acted quickly to hold an additional shareholder meeting to approve both a further 10% limit and to approve the issuance of a prospectus to enable further substantial issuance. Shareholders supported these moves and the issuance of new shares has continued and the prospectus has now been published.
“Setting fees is another key role for the board, aiming to strike a fair balance between minimising the cost to shareholders and making sure that the investment manager is appropriately incentivised to deliver excellent investment performance. The board of ATT has paid close attention to ensuring a fair fee structure and most recently agreed a tiered management fee which allows both individual shareholders and the investment manager to benefit from the significant growth of ATT during 2018.”
Richard Gubbins, Chairman of Henderson Alternative Strategies Trust said: “Shareholders also benefit from the board’s ongoing dialogue with the manager on fee rates ensuring that shareholders pay a fair price for investment management services. Like many other investment trusts, Henderson Alternative Strategies Trust recently agreed a tiering arrangement with the investment manager so shareholders enjoy a lower management fee rate for assets above a certain threshold. This discount for size is something that has been driven by boards and accepted by investment managers.
“It is the aim and ambition of our board to achieve performance through increasing the net asset value of our company and reducing the size of our discount, and we saw a tiered structure as appropriate to the level of net asset value that we would aspire to achieve in future years.”
James Barnes, Chairman of Dunedin Smaller Companies (DSC) said: “The DSC merger has come about primarily as a result of a number of factors all coming together at the same time. The board identified an opportunity following the merger of our manager’s parent entity Aberdeen Asset Management with Standard Life bringing one of the leading performers in our sector under the same management roof as ourselves and broadening the investment expertise available to us.
“At the same time we were aware of the effects that the company’s size and limited secondary market liquidity had on shareholders notwithstanding the company’s recent good performance.
“We therefore asked our manager to look at the various options that might be available to us under the new Aberdeen Standard Investments umbrella. Our conclusion was that, of the various options available, if we could get the costs right, a merger with Standard Life UK Smaller Companies Trust offered the most benefits to our shareholders in terms of discount and future potential for dividend growth.
“Although once underway the merger process is somewhat formulaic, the board has an important role in staying on top of that process in terms of costs. In addition, the board had a particular regard to our private individual shareholder base both in terms of a deal structure that protected capital gains and of how ‘user friendly’ the documentation was.
“What we felt was a real success in this instance was all parties working together to achieve a significantly lower than anticipated realignment cost of circa 0.8% - a particularly good result given the relatively illiquid nature of the portfolio and a total transaction cost of £1.8m, including stamp duty representing 1.13% of assets.”
How is the role of boards developing?
Gay Collins, Director of JPMorgan Global Growth & Income said: “Gender diversity has been a significant development. When I first came onto the board in January 2012, my first AIC seminar suggested that women were a rare commodity. This has changed significantly over the last six years, and so has the experience of the board. Many more of us come from a marketing or PR background and I feel that adds an extra dimension in terms of pushing for sales and marketing initiatives. Funds are sold not bought, and investment trusts need to up their game.”
Robert Jeens, Chairman of Allianz Technology said: “Simply put, boards are responsible for efficient and effective leadership of the company and the company’s affairs. But the requirements and knowledge needed to deliver this are forever changing. As well as monitoring investment strategy and performance, we are also needing to comply with evolving and increasing statutory and regulatory requirements, as well as understanding the changing profile and investment preferences of our individual shareholders.
“Change makes the role forever interesting but also challenging. However, as a board director of an investment company you really can make a tangible difference and to be associated with one that is growing in size and profile by delivering outperformance to its investors is incredibly satisfying.”
Leading the way
Ian Cowie explains why independent boards are a clear benefit of investment companies
Individual investors may feel overcharged and undervalued by some financial organisations that seem to be more interested in the weight of money wielded by institutional investors. But shareholders in investment companies enjoy valuable protection built into the structure that is currently unavailable to investors in any other form of pooled fund.
Who looks after individual investors? Independent directors of investment trusts, that’s who.
What do these directors do? Unlike unit trusts and open-ended investment companies (OEICs), investment trusts operate under company law and are led by a board of directors who have a legal obligation to represent the interests of all shareholders, who are the owners of these companies.
How do boards of directors deliver value to shareholders? First, by exerting downward pressure on fund managers’ fees, thus minimising costs borne by shareholders. Second, where necessary, by sacking fund managers whose performance disappoints, thus seeking to maximising returns to shareholders.
Fine words, but where’s the proof they are put into action? More than a third of investment trusts have cut management fees in the last five years. Replacement of fund managers - who are hired and fired by boards of directors - is a rarer event but remains a beneficial ‘stick’ to balance the ‘carrot’ of bonuses.
Leading analyst Simon Elliott of the stockbroker Winterflood recalled a few recent examples. He told me: “We believe that the board of what was Schroder UK Growth and is now Baillie Gifford UK Growth made a decisive move in appointing Baillie Gifford as its investment manager, which is reflected in the fund’s subsequent re-rating.
“Another positive development, in our opinion, is the pending merger between Standard Life UK Smaller Companies and Dunedin Smaller Companies. Both boards involved have been supportive of this move and we believe it makes sense to consolidate the vehicles, which should lead to better market liquidity while its ongoing charges ratio should fall.
“The case of John Laing Infrastructure’s acquisition is an interesting one, as is the role of its board in accepting the offer. We can see the board’s argument that the offer represented a premium that was equivalent to several years of expected returns.”
Another shrewd observer of the stock market, Alan Brierley of wealth managers Canaccord Genuity, pointed out: “Schroder Asian Total Return and Monks investment trusts both had their fortunes reinvigorated as a result of decisive action taken by their boards after many years in the wilderness.
“Schroder Asian Total Return’s board addressed a poor performance record by introducing an outstanding management team with an innovative approach to portfolio construction. The team has since continued to deliver truly exceptional long-term risk-adjusted returns.
“The market capitalisation has risen by more than 50% since the beginning of last year and this has improved marketability and lowered the ongoing charge. We also welcome the recent reduction in management fees.
“At Monks Investment Trust, the past three years have seen a dramatic transformation of fortunes. In March 2015, the Board appointed Baillie Gifford’s Global Alpha team and there has been a significant reversal in supply/demand dynamics which has seen a 12% discount to net asset value move to a 1% premium.”
Much of the work of directors is less dramatic but also important, as James de Sausmarez, head of investment trusts at the asset manager Janus Henderson explained: “The board challenges and questions, they ask why a fund manager is doing what he or she is doing - and I think managers enjoy the interaction.
“If you are an individual investor, it’s enormously comforting to know there is a group of diversely skilled people overseeing the manager. Mutual funds – such as unit trusts and OEICs – don’t have the same level of challenge.”
So, while most of the work of investment trusts’ boards of directors is undramatic and unseen, it does give this form of pooled fund important advantages over rival routes into the stock market. In the view of this investment trust shareholder for more than a quarter of a century, it also provides refreshing exceptions to challenge widespread cynicism about City slickers patting each other on the back at the expense of small savers.
Burn before reading
AIC chief executive, Ian Sayers, explains what he would like to do with Key Information Documents (KIDs)
“What you might get back after costs in an unfavourable scenario – 13.37% per year. Potential losses from future performance at a medium-low level. Poor market conditions are unlikely to impact the ability for you to receive a positive return on your investment.”
If you read this somewhere, you might well wonder if it was some kind of financial scam. As the FCA warns on its own ScamSmart website:
“Be wary of promised returns that sound too good to be true”
In fact, it is not a scam. The text is lifted, pretty much word for word, from an actual Key Information Document (KID) of an AIC member. The KID, in case you are not aware, is the three page document that, from the beginning of this year, every purchaser of investment company shares receives and is meant to help them make better investment decisions and appreciate the risks.
You may also wonder why the company allowed such a reckless document to be published. The answer is it had no choice. The KID layout, calculations and much of the accompanying wording is prescribed by EU regulation. Depart from it, and regulatory action could be taken. (You can’t find these documents, by the way, on the AIC website, as we think it would be irresponsible to provide them when we are not required to do so.)
And don’t think the AIC’s members are secretly happy that a regulated document is flattering them with generous projections and low risk ratings. They are not. In fact, I have never known a time when so many of the independent directors are up in arms about what investors are being told. The AIC’s views are summed up in the title of the research we produced demonstrating the problems of KIDs, ‘Burn before reading’.
So how did we get into such a mess? The answer lies in the fact that these projections of risk and return are based on what has happened over the past five years. “Hang on!” I hear you cry. “I have had to read and listen to the phrase “Past performance is not a guide to the future” ad nauseam in every financial advertisement for years.” The problem is, no-one seems to have told European regulators, who have hard-wired this into the KID.
And things don’t get much better in market downturns. The AIC synthesised what KIDs would have looked like after the 2008/9 crash. Then, many would have been telling you that you would lose money in all future market conditions. Had you taken this advice, you would have missed out on one of the strongest rallies we have seen in generations. So KIDs are essentially telling you to buy when markets are high and to sell when they are low. A pretty toxic combination.
Of course, more experienced investors will ignore them, recognising the nonsense this all is. But KIDs were designed precisely with less experienced investors in mind. And if people do get misled by these documents, and lose money as a result, it won’t be a mis-selling scandal (that implies that the person doing the selling has done something wrong, which they haven’t), so there won’t be any compensation. It will be a regulatory scandal, one we have being warning about since 2010 when KIDs were first being developed (yes, you did read 2010 right).
So we are calling for fundamental reform of the regime before more harm is done. Confidence in financial services is not great at the best of times, but if consumers cannot even trust the information that regulators demand is sent to them, where does that leave them? Except perhaps, with some convenient firelighters for when the colder months set in.
The Brazilian general election
Brazil-focused managers discuss the prospects
On Sunday 7th October Brazil goes to the polls for a general election. It’s been a difficult period for the emerging market country as Brazil has had to cope with a severe recession and several political crises. But with news that its recession has ended and the prospect of political change on the horizon, how are investment companies viewing the prospects for Brazil?
The AIC has gathered comments from the managers of BlackRock Latin American and Aberdeen Latin American Income.
William Landers, portfolio manager of BlackRock Latin American, said: “To invest in Brazil today, one needs to take a view on the country’s direction post the October presidential election. Our base case has always been that the electorate would eventually side with a president who would continue with the reform agenda of the past two years, therefore maintaining the country on the path of economic recovery of the past two years.
“This continues to be our base case, despite the fact that second round polls (there are currently
"If we are correct, we would expect some currency appreciation and equity market re-rating, leading to positive returns for the Brazilian equity market"
William Landers, BlackRock Latin American
13 candidates for president, and in the likely case that no one receives 50% of the votes in the first round on October 7th, a second round with the two top vote getters will take place on October 28th) are showing that most potential pairings in this second round are ‘too close to call’.
“If we are correct, we would expect some currency appreciation and equity market re-rating, leading to positive returns for the Brazilian equity market. A return to the same populist policies that led Brazil into its worst recession in recent history during 2014-16 would have the opposite effect.”
Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Standard Investments, which manages Aberdeen Latin American Income, said: “The backdrop of Brazil’s election on 7th October is defined by the corruption of the entire political establishment and a period of swingeing economic decline. Both have led Brazil’s electorate to be amongst the most divided and dissatisfied in the country’s history. It is no surprise therefore that populism is thriving in Latin America’s largest democracy. The first round of the presidential election will probably see the far-right populist Jair Bolsanaro and Fernando Haddad, the candidate from the disgraced, left-wing Workers’ party taken through.
"If Bolsanaro wins then we should see a relief rally in Brazilian assets"
Edwin Gutierrez, Aberdeen Latin American Income
“The second round will be close. Bolsanaro has the highest rejection rate of any of the candidates and is deeply unpopular amongst the many minority groups. Meanwhile, Haddad represents the Workers’ party which has dominated Brazilian politics for so long and whose credibility has been destroyed by wide-ranging corruption investigations in recent years. But the second round of Brazilian presidential elections are largely defined by a decision about who voters don’t want to be president, more than who they do want. On this calculus, voters are likely to reject Haddad as the face of the status quo and opt for the promise of radical change under Bolsanaro.
“Bolsanaro is certainly the more market friendly of the two candidates. But he has credible plans for tackling the country’s two most urgent economic issues: pension reform and privatisation. If Bolsanaro wins then we should see a relief rally in Brazilian assets.”
William Landers, portfolio manager of BlackRock Latin American, said: “Brazil is still seen as a high beta market within the emerging market universe. It does not offer the opportunity to invest in technology stocks like many Asian markets, and it does not have the reliance on international funding that has caused issues in Argentina and Turkey during recent periods of US dollar strength versus emerging currencies. But Brazil’s unfinished reform agenda and growing domestic debt, along with relative low domestic equities ownership, leave it vulnerable to drawdowns in periods when global investors are uninterested in emerging markets equities.
"Low interest rates (at least from a Brazilian standpoint) have begun to cause an increase in domestic equity ownership, which over time should reduce the market’s volatility caused by external factors and global flows"
William Landers, BlackRock Latin American
Investment companies with highest exposure to Brazil. Source: AIC/Morningstar.
“Under a scenario of successful completion of the reform agenda (focus on pension reform and fiscal simplification), the outlook for Brazilian equities is positive. The economy is still in the early stages of recovery following the almost 8% reduction in the local base rate, Selic, to 6.50%. Low interest rates (at least from a Brazilian standpoint) have begun to cause an increase in domestic equity ownership, which over time should reduce the market’s volatility caused by external factors and global flows. This virtuous circle of improving economic growth, low interest rates and higher domestic interest in equities should be positive for local equities’ performance and valuation, potentially leading to a prolonged period of equity market rerating.”