Jeff Prestridge: don't underestimate the power of investment trust boards

Our star columnist outlines the crucial part investment trust boards can play in delivering attractive returns for shareholders.

Most stock market listed investment trusts do a pretty good job when it comes to making money for shareholders.

It hasn’t always been that way - remember the split capital investment trust scandal of the 1990s when some 50,000 investors lost a lot of money in funds marketed as low-risk? But the industry has by and large learnt its lesson, moved on, become more investor-centric, and is now in pretty good shape.

What makes a ‘good’ investment trust is one that is well run and delivers on its objectives – be it, for example, generating capital return or providing an attractive mix of income and capital growth. Of course, that depends upon a quality fund manager or investment team being at the helm (not a guarantee).

But it also relies upon a board of directors that is prepared to earn its proverbial corn by looking after the best interests of shareholders.

The role of investment trust boards cannot be underestimated. Unlike their authorised corporate director (ACD) counterparts in the unit trust world - which have just been given a collective regulatory kicking by the Financial Conduct Authority for not being up to scratch - the most effective trust boards are hands on.

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They’re all over the managers, demanding stellar investment performance, questioning periods of moribund shareholder returns and forever requiring improved value for money – things that ACDs just don’t get involved in.

Indeed, what do ACDs actually do other than take a fee for their services? Answers on a postcard to: jeff.prestridge@mailonsunday.co.uk.

I digress. In recent years, most (not all) trust boards have upped their game. In layperson’s terms, they’ve become far more boisterous.

This has resulted in some positive outcomes for shareholders.

First, it has meant some investment managers of trusts agreeing to reduce their annual fund charges - fees that ultimately reduce the returns that end up in the pockets of shareholders.

Edinburgh based Baillie Gifford has led the way, cutting charges on a number of its pristine trusts including the likes of Edinburgh Worldwide (LSE:EWI), Pacific Horizon (LSE:PHI) and Baillie Gifford Shin Nippon (LSE:BGS). Yet it’s a good habit that is catching on.

According to the latest data from the Association of Investment Companies (AIC) – the investment trust industry’s flag waver – the boards of 17 trusts have already this year cajoled the investment managers they oversee into accepting fee changes that benefit investors.

The likes of smaller companies trust Herald (LSE:HRI), Martin Currie Global Portfolio (LSE:MNP) and Keystone Positive Change Investment (LSE:KPC) (another Baillie Gifford fund) have all gone down this route. Hopefully, there will be another 17 in the second half of this year.

Second, and more ruthlessly, some trust boards have not been frightened to take even more draconian action.

Occasionally, they’ve wielded the axe by terminating the management contract of the incumbent investment team and brought in fresh blood. A move usually triggered by a period of sustained poor investment performance.

It recently happened at Jupiter US Smaller Companies, resulting in US based Brown Advisory being appointed to manage the trust’s assets – and the fund name being changed to Brown Advisory US Smaller Companies (LSE:BASC).

And come September, provided shareholders give it the thumbs up (a near certainty), Genesis Emerging Markets Fund (LSE:GSS) will be managed by Fidelity International and renamed Fidelity Emerging Markets.

The annual management fee will also be cut from 0.9% to 0.6%.

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Of course, fund management changes don’t always have a positive impact. Investment trust Edinburgh Investment (LSE:EDIN) (not to be confused with Edinburgh Worldwide) has had Fidelity, Neil Woodford (yes, him) and Mark Barnett (‘son of Woodford’)  running its assets at various stages over the past 20 years – and has never quite delivered the results shareholders expected.

Following the sacking of Mr Barnett (at the time working for Invesco) in late 2019 after a prolonged period of underperformance, the trust is now being run by James de Uphaugh and Chris Field at Majedie Asset Management.

They’ve had a goodish past year, beating the average return for the UK equity income peer group (43% versus 40%), but there is plenty more hard work to be done before Majedie can start boasting about its positive impact on the trust.

Annabel Brodie-Smith, a director of the AIC, says trust boards play an invaluable role in ‘protecting investors’ interests’ and she welcomes the fact that more of them are ‘seizing the day to address performance issues for their shareholders’.

She’s right. Investment trust boards aren’t comprised of miracle workers, but when directors go about their work diligently, they are a force for investment good.

So, more diligence, please. Lower fees, please. And better investment returns – double please. Not much to ask, I say.

Jeff Prestridge is personal finance editor of the Mail on Sunday. He is a freelance contributor and not a direct employee of interactive investor.