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FCA circles as Invesco loses supporter in attack on Enhanced Income board

FCA circles as Invesco loses supporter in attack on Enhanced Income board
  • FCA requests information on Invesco's controversial requisition against board of Invesco Perpetual Enhanced Income;
  • GAM Star Credit Opportunities withdraws support for Invesco's attempt to oust chairman and key non-executive director;
  • Invesco star bond fund managers Paul Causer and Raul Read complain board was ‘overly aggressive’ in fees negotiation;
  • Extraordinary general meeting set for 20 July;
  • Board urge shareholders to reject requisition.

(Update) The Financial Conduct Authority has contacted the board of Invesco Perpetual Enchanced Income (IPE) raising the prospect of a regulatory intervention in the investment trust’s dispute with fund manager Invesco Perpetual.

Publishing a circular in response to the Invesco’s unprecedented move to remove the trust’s chairman and another of its non-executive directors, the board revealed ‘the company is responding to a request for information about the circumstances surrounding the requisition.’

Although the Jersey-based, London-listed loan fund is not directly regulated by the FCA, Invesco is. The regulator has scope to challenge the fund manager if it believes its actions have treated shareholders – particularly investors in regulated ISA and pension plans – unfairly or in a way that fails to meet their reasonable expectations.

Invesco declined to comment on whether it too had been approached by the FCA.

GAM withdraws

The fund management group has been on the back foot over its decision to use its 16% stake in IPE to oust chairman Donald Adamson and Richard Williams, chair of IPE’s management engagement committee, having handed in its notice following a row over charges.

Adamson has condemned the move as a ‘cynical’ attempt to disrupt the process of finding a new fund manager, a view that has been supported by wealth manager Brewin Dolphin and commentators such as Investment Trust Insider columnist Ian Cowie who believe Invesco is abusing its power to prevent the board from doing its job of getting a good deal for shareholders.

In a setback for Invesco the board also revealed that one of the fund manager’s backers, GAM International Management, had withdrawn its support for the requisition which will be voted on at an extraordinary general meeting on 20 July. It holds 3.9% of the shares, held in the GAM Star Credit Opportunities fund run by Anthony Smouha of Atlanticomnium.

That leaves Consistent Unit Trust Management, manager of the small Practical Investment Fund, as Invesco’s only public supporter. It owns 2.4% of IPE shares.

Board ‘overly aggressive’

In a surprising development, Invesco’s star bond fund managers Paul Causer and Paul Read, who had run the IPE portfolio for 19 years, suggested the fund manager had not been the principal actor in the move against Adamson and Williams.

Making their first comments on the dispute Read (left) and Causer (right) said: ‘Following the fall in share price we were approached by a number of third party shareholders, represented by Panmure Gordon, to participate in the requisition notice.

‘This request was submitted to our governance process and considerable advice was taken before we agreed to participate. We believe that this action gives all shareholders the chance to express their opinion,’ they said.

Causer and Read, who manage around £30 billion in bond funds, added they had chosen to resign not because of the disagreement over a performance fee, which they confirmed they had agreed to drop, but because of the breakdown in the relationship with the board which they said had been ‘overly aggressive’.

They said the board issued a 48-hour ultimatum served on Easter bank holiday Monday and attempted to seek additional changes to the management contract after an agreement had been reached. This is believed to have been a reduction in their notice period from 12 months to three months.

‘After considerable thought, we decided this was not a board that we could or should continue to work with and, given that the shares traded at a premium, it was important to resign and make this disagreement public before further issuance took place.’

The share price fall since Invesco resigned has de-rated the shares. Having traded at an 8% premium over net asset value (NAV) in April, the shares now stand at a small discount to NAV.

Don’t vote, Invesco urged

The duo said they were proud of their track record, in particular the 108% total return after fees the high-yielding trust had delivered to shareholders since a rights issue during the 2008 financial crisis. They said the trust had been one of the best investments ever made by Invesco-managed funds, noting that the board had previously been happy for the fund manager to vote its clients’ shares, for example, when authorising the issue of new shares.

The board challenges this, saying its understanding was that Invesco rarely voted its shares at annual general meetings. ‘Given this past prudent behaviour, the board would expect them to take a similar approach on these resolutions to ensure that the will of independent shareholders is not prejudiced,’ it said.

It urged shareholders to vote against Invesco’s requisition and attempt to replace Adamson and Williams with Hazel Adam and Howard Myles, saying it would be ‘firmly’ against their interests.

Pressure for exit

Having received interest from many rival fund managers to take on the mandate, analysts at Winterflood Securities believe the board will look to appoint a successor to Invesco before the egm next month.

‘This may mollify a certain proportion of the share register, who may well be impressed with the new manager’s credentials, particularly if the current dividend level (6.9% historic yield) can be maintained,’ Winterflood said.

That may not be the end of the battle, however. Even if Adamson and Williams remain in post, the board will come under pressure to give unhappy investors an exit, thus shrinking the fund and making it less attractive. The risk of not allowing that would be to create an ‘overhang’ of selling pressure that would prevent the shares from returning to their previous high rating.

Before the bust-up, Invesco charged a tiered annual management fee of 1% on the first £80 million of net assets, falling to 0.7% on the next £70 million and 0.6% above £150 million, giving it an overall fee of 0.9%. In addition it received a performance fee of 20% of gains over a hurdle of 1% over the Libor interest rate, falling to 10% for funds over £80 million. This was higher than rival funds with less impressive performance and generated a total payment of 2.15% of net assets in its last financial year.



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