GLI Finance, the fund that I am on the board of, has just published its annual report and accounts.
The whole thing is 75 pages long and, as chair of the audit committee, I’m responsible for making sure these are not only accurate but if, taken as a whole, they are fair, balanced and understandable and provide the information necessary for our shareholders to assess the company’s performance, business model and strategy.
The rules about the content of the accounts are fairly prescriptive and half the job is making sure we have not left anything out, but every year I get more worried about the need to make our accounts “understandable”.
We add in as much explanation as we can but, presented with 75 pages of data, does anyone actually read it? Next year the accounts might look different again: there are more accounting standards for us to adopt.
I got Alliance Trust's accounts through the door the other day, these were 120 pages long. There are a few more pictures and graphics in there but there is also a lot more content - some daft little extra bits like the greenhouse gas emissions breakdown that I’ve moaned about before but mostly just pages and pages of extra information about every little aspect of the business.
The couple of pages of chair’s statement that used to give shareholders most of the information they needed in a concise way are now scattered across the first few dozen pages of the report. Is this a good thing?
All this increased verbiage is not much help for investors. Some funds are undoubtedly complicated and there are good reasons why they can’t disclose everything we might like then too.
For example, I read Juridica’s results the other day. This investment company, which funds people’s legal claims and takes a cut of any damages awarded, is not allowed to tell us the names of the cases it is funding. It doesn’t tell us either what they think each is worth – that might prejudice the outcome of a damages claim.
Shareholders might like more detailed information but it’s probably not practical for Juridica to provide it. One thing I would say about the announcement though, it looked at first glance as though the fund was doing well.
Then I realised the net asset value was falling and that most of that fall was because it was distributing capital as its operating expenses absorbed a large chunk of its profits (mostly unrealised gains on its investments). The operating expenses are high as the fund operates a 2 and 20 fee structure – 2% base fee and 20% performance fee over an 8% hurdle – and the non-executive directors cost a fortune – circa $350,000 (£210,000) for the chair and $150,000 each for the other two.
Obscuring the facts
Now consider Duet Real Estate Finance, like Juridica it anonymises its investments - we know they’ve lent some money, how much, which country the borrower is in and roughly what type of assets they have as security - offices, hotels, retail for example but that’s it. Not the interest rate, not the term, no indication of the credit worthiness of the borrower. Why not?
What’s so embarrassing about borrowing money from Duet that means you refuse to let them tell the people who put it up where it’s gone?
The worst offenders in my book though are the hedge funds.
Brevan Howard Global just published its accounts. The net asset value performance of its various share classes was pretty dire ranging from +1.47% for the euro class to +2.32% for the sterling class. The accounts tell us how much was invested in each Brevan Howard fund at the end of the year and what the performance of those funds was but there’s no information on the strategies adopted by those funds in the year or their exposures.
We’re told the allocation to emerging markets held back performance but not why the manager(s) of those funds read the runes wrong – after all the beauty of a hedge fund is that it can deliver positive performance in falling markets.
I think this lack of disclosure (just 10 lines on a 44 page report explain why they allocated the portfolio in the way they did) unnerves investors. If people don’t admit why things didn’t turn out the way they’d anticipated, how are you ever going to believe they’ll improve in the future?
Everybody uses the internet nowadays, why not stick the boring stuff about the terms of reference of the various board committees on there and let the accounts just tell investors what they own, what happened last year and what might happen in the future?
James Carthew is a director of Marten & Co