Investment Trust Insider - Opening the door to investment trusts

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Ian Cowie: trusts need much more shareholder democracy

Ian Cowie: trusts need much more shareholder democracy

Shabby behaviour by the fund management giant, Invesco Perpetual, is pushing shareholder democracy — or the lack of it in practice — up the news agenda.

While this might sound like a tedious technicality, one of the important advantages of investment trusts over other forms of pooled fund is that independent boards of directors are appointed to represent shareholders’ interests. Sometimes these may diverge from fund managers’ desire to extract higher fees, as the ongoing scandal at Invesco Perpetual Enhanced Income (IPE) demonstrates.

So it is nothing short of outrageous for Invesco to retaliate against directors, who are calling for a cut in its above-average fund management fees, by seeking to have two of these genuinely independent board members sacked. Specifically, having resigned as fund manager the $1 trillion group is using its 16% stake in this investment trust to vote for IPE’s chairman, Donald Adamson, and chair of its management engagement team, Richard Williams, to be removed as directors.

Sadly, it is no surprise to see the overpaid and underworked bureaucrats at the Financial Conduct Authority (FCA) sit on their fat arses while this shameless attempt to gouge shareholders’ funds unfolds. Invesco has extracted no less than £12 million in fees from this £123 million bond fund during the last decade.

Even before Invesco’s fund managers presided over a 4.3% loss in IPE’s total returns in the past year (to yesterday’s market close), shareholders were entitled to ask: ‘Whose money is it anyway?’

To put this in perspective, the decline in the share price reflects the recent uncertainty over who will manage the fund in future. The actual portfolio remains in positive territory over one year with a 1.3% increase in net asset value (NAV), according to Numis Securities data. Over five years managers Paul Causer and Paul Read have grown NAV by 45.9% with a share price return of 58.3%.

By comparison, Henderson Diversified Income (HDIV), Invesco’s only rival in the Association of Investment Companies (AIC) Global High Income sector, has seen its NAV slip 2.2% over one year though its shares have held up better, down 1.6%. Over five years both NAV and share price are up just over 32%, behind Invesco. Both funds deliver above average income of 6.8% and 5% respectively.

Now two leading fund managers have expressed unease to Investment Trust Insider about how shareholder democracy is failing — and a major fund platform is providing a solution.

Simon Crinage, head of investment trusts at JPMorgan Asset Management, told me: ‘We’re seeing turnout at general meetings, both in actual shares voted and in physical attendance, falling. A by-product of low voting turnouts is the risk of minority shareholders having undue influence in a company’s affairs.

‘As shareholdings are increasingly held in nominee accounts on behalf of investors this means the ultimate owner may be at risk of becoming disenfranchised which is of grave concern to us.

‘Communications and proxy voting instructions are sent to the registered holder — that is, typically the nominee. This means, in many cases, the information doesn’t always find its way to the ultimate owner.’

For example, the vast majority of individual savings accounts (ISAs) and self-invested personal pensions (Sipps) are structured as nominee accounts. So, while this fiduciary disconnect might sound technical, it strikes at the heart of a share-owning democracy.

Fortunately, Simon White, head of investment trusts at BlackRock, can also see the scale of the problem. He said: ‘Private shareholders who have purchased their shares through online broking platforms now represent the largest block of shares owned in many investment trusts.

‘Although it is possible for the beneficial owner to obtain the right to vote the shares held in the nominee company, it is often not straightforward or easy to do so. This becomes much more important when critical votes which affect the future of the company are being cast.

‘More online platforms adopting easier and more intuitive ways of allowing private shareholders to exercise their votes online should help with this. Simple voting mechanisms which allow private shareholders to engage effectively with the investment trust companies in which they hold shares will become more important.’

For example, Broadridge is one company that provides technical support for online brokers to enable clients to vote their shares electronically. Ryan Hughes, head of active portfolios at the platform AJ Bell explained how this free service works in practice: ‘Customers can request to vote on matters such as directors’ re-election and we will process that for them.

‘It is important for private investors to remember that they own part of the investment trust they have invested in. This gives them a right to have their say in the way the trust is run and they can do that by exercising their right to vote on corporate actions and resolutions.’

While the rest of the City waits for Invesco to come to its senses and avoid irreparable damage to its reputation — or even, conceivably, for the FCA to remember it is paid to protect investors, not fund managers — let’s hope more online platforms follow AJ Bell’s lead.

Here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.


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