The third in our series of short video guides to investment trusts.
Our animated guide explains how the boards of directors protect investment trust shareholders by overseeing the work of fund managers.
Previously Gavatar explained how investment funds pool people’s money so they can invest in the stock market and showed how investment trusts are one of three types of investment fund available to the public.
Can’t watch now? Read the transcript
One of the things that makes investment trusts special is that they are companies in their own right.
They are unusual companies though. Although listed on the London Stock Exchange, few have any employees.
What they do have are boards of part-time directors whose job is to protect the interests of their shareholders.
That means overseeing the fund manager who is investing shareholders’ money to ensure he or she is doing a good job.
Ultimately, if investment trust boards believe their fund manager is doing badly – or not investing in the way they want – they can sack the company and hold a ‘beauty parade’ to find a new one.
Boards are also responsible for marketing their investment trust, communicating with investors and ensuring the company complies with all financial regulations.
A board is run by a chair – man or woman – and meets six to 10 times a year.
It will have four to eight directors, including the chair, who will be professionals with investment or business experience.
Most will be non-executive directors, meaning they are not full-time employees of the trust.
Most will also be independent from the fund management company, although it is possible for the fund manager to have one or two representatives on the board.
Although boards have faced criticism for being too close to their fund managers, they do an important job and increasingly seen as doing it well.
UK financial regulators recently proposed that other types of investment fund should adopt independent boards of directors, a sign that investment trusts have got this one right.