How Does a Board Protect Investment Trust Shareholders?

ASK THE EXPERT: What role does the board of directors play at an investment trust, and why do these closed-ended funds have certain advantages over unit trusts?

Emma Wall 13 January, 2015 | 12:00AM
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Emma Wall: Hello and welcome to the Morningstar series, 'Ask the Expert.' I'm Emma Wall and here with me today is Rachel Beagles to discuss the role of a board in investment trusts. 

Hello Rachel. 

Rachel Beagles: Hi Emma. 

Wall: So, you sit on five boards including Securities Trust of Scotland (STS) and BlackRock Emerging Europe (BEEP). I thought we could ask you today, as the expert, what exactly is a board because it's a feature unique to investment trusts—open-ended funds don't have boards. So, what is the role? 

Beagles: Certainly, it's a very important point that you make. The board provides a unique layer of governance that has responsibility to act in shareholders' interest at all times and that's something that unit trusts don't have. 

Wall: Investment trust boards are very active, as you say, keeping shareholders' interests at heart. Perhaps you could give some examples where the board will step in to make changes. 

Beagles: Yes. There are a few situations where I think it's particularly important. One might be if the fund has suffered a period of prolonged and meaningful underperformance and it might be necessary for the board to make changes. Another might be simply that the fund manager has retired and so there is a change of personnel. Another might be that the fee structure is no longer appropriate or the fee levels might be deemed to be too high in an industry context and again, that independent board acting on shareholders’ behalf is really crucial. 

Wall: In 2014 in particular we saw fees in investment trusts really come down and it was boards behind that change, wasn't it? 

Beagles: Yes, that's absolutely right. RDR [Retail Distribution Review] has given us a level playing field, and on the one hand that gives us access to a whole chunk of the market that potentially hasn't been available to us in the past; but it has also given us a much more competitive environment with clean share structures. And boards have—and I think will continue to—react to those changing market circumstances. We've seen a number of funds remove performance fees. We've seen a number of companies also cut the levels of fees in absolute terms as well. 

Wall: You mentioned there RDR. This is going to be and has been quite a driving force of money into investment trusts, because in the past investment trusts perhaps haven't had the popularity that they deserve considering performance. 

Beagles: That's right and I think that's been for a number of reasons. We've touched on the incentivisation structure, but I think there has also been jargon that has put investors off and I think boards are having to work harder to overcome those barriers. So, issues such as the discounts, also gearing has potentially put people off. 

I think it's important that we explain to the marketplace what advantages the investment trust structure does provide. The fact that it's closed ended means that in a falling market the discount can absorb the liquidity flows rather than the fund manager being forced to sell the underlying positions in a situation where he might not want to. So, that's one example. Gearing; over time generally one would bet on equity markets in particular going up, so it's sensible that companies in the right situations employ gearing and that can enhance the returns to shareholders. So, those are two of the advantages of an investment trust structure. 

One other benefit is that investment trusts can retain income. So, obviously, dividends to shareholders can be smooted over time and at a time when the market is experiencing cuts in dividends, we can still pay increasing dividends to shareholders. That's another benefit. 

Wall: So, perhaps with education and with explanation we should see greater inflows into investment trust structures? 

Beagles: I would hope so. And certainly with all the investment trust boards that I sit on we're seeing increased retail ownership of our funds and I think with responsible action by boards and in the current marketplace I would hope that would continue. 

Wall: Rachel, thank you very much. 

Beagles: Thank you. 

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Securities Trust of Scotland Ord216.47 GBX-1.61Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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